SPECIAL ECONOMIC ZONE (AMENDMENT) RULES, 2018 – AN OVERVIEW

[Mr. M. GOVINDARAJAN]

Rules

The Central Government, for the purposes of implementation of the provisions of ‘Special Economic Zone Act, 2005’ made the ‘Special Economic Zone Rules, 2006 which came into effect from 10.02.2006.  The said rule has been amended from time to time.

Committee

In order to align the SEZ Rules, 2006 with the GST laws as well as for removal of various difficulties faced, a committee under the Chairmanship of Dr. L. B. Singhal, Development Commissioner, Noida SEZ was constituted by the Department of Commerce, Ministry of Commerce and Industry to review the SEZ Rules, 2006 and to make necessary recommendations.    Stakeholders were requested to go through the recommendations of the Committee and send their comments along with the requisite formulations, if any, to email id: [email protected] latest by 31st December, 2017.  

Amendment

On considering the recommendations of the Committee and the suggestions received from the stakeholders, the Central Government made the ‘Special Economic Zone (Amendment) Rules, 2018, vide Notification No. G.S.R. 909 (E), dated 19.09.2018, which came into effect from 19.09.2018.   In this article the changes that have been taken place in the Rule due to the amendment are discussed.  This amendment omitted many provisions, omitted some words in any provision or inserted any words in any provision, inserted new provisions and substituted new provisions for the existing provisions.  The GST is included in these rules replacing the service tax and central excise which are subsumed in GST.  The amendment brought out many changes in the procedural aspect.  The changes that are brought out in the amendment are discussed in this article.

Omission of definition

The definition of ‘Duty Entitlement Pass book scheme’ under Rule 2(1(k) and the definition ‘Duty Free Replenishment Certificate’ under Rule 2(1)(l) are omitted.

Proposal for approval as co-developer

The amendment inserted a new section 3(A) which provides that the proposal under sub-section (11) of section 3 for providing infrastructural facilities in the Special Economic Zone shall be made in Form A1 to the concerned Development Commissioner, as specified in Annexure III, who, within a period of fifteen days, shall forward it to the Board with his recommendation.

Forwarding of proposal to Board

Rule 4 provides that the State Government shall forward the proposals received, to the Board of approval along with its recommendations within 45 days from the date of receipt of the proposal.  The amendment now requires the State Government to forward the proposal to the Board of approval through the jurisdictional Development Commissioner concerned.

Bio-Technology and Health Centre

Rule 5(b)(ii) provides that there shall be no minimum area requirement for setting up a Special Economic Zone for Information Technology or Information Technology Enabled Services, but a minimum built up processing area requirement shall be applicable, based on the category of cities.

The amendment inserted ‘Bio-Technology and Health Centre’ to the list.

Exemption to SGST

Rule 5(5)(a) provides exemption to SEZ from the State and local taxes,  levies and duties, including stamp duty, and taxes levied by local bodies on goods required for authorized operations by a Unit or Developer, and the goods sold by a Unit in the Domestic Tariff Area except the goods procured from domestic tariff area and sold as it is.

Now the amendment brought the ‘State Goods and Services Tax’ as exempted for SEZs.

Processing area

The proviso to Rule 11(2) provides that in case of a Special Economic Zone for information technology or information technology enabled services or electronic hardware or biotechnology, the Development Commissioner shall approve such measures and inform the Board   accordingly.

The amendment requires the Development Commissioner shall inform the approval to the ‘Approval Committee’ instead of Board.

Space for Development Commissioner

The amendment inserted sub clause (9A) of Rule 11 which provides that the Developer shall ensure sufficient and adequate space, as per the applicable Central Public Works Department norms, for the Office of Development Commissioner and Customs Officers posted in the Special Economic Zone.

Refund of tax

Rule 11A(1) provides that the Customs duty, Central Excise duty,  Service Tax and such other Central levies and tax benefits already availed for creation of such infrastructure shall be refunded by the Developer in full, without interest. 

The amendment replaced the ‘service tax’ by ‘Central Goods and Services Tax, Integrated Goods and Services Tax and State Goods and Services Tax’.

Certificate from professional

Rule 12(7) requires that a developer is to submit half yearly returns to the Development Commissioner along with the certificate obtained from an independent Chartered Engineer regarding the utilization of goods and services.  The amendment added practicing Chartered Accountants and Cost Accountants for this purpose.

Proposal for approval of Unit

Rule 17(1) provides that a consolidated application seeking permission for setting up of a Unit and other clearances, including those indicated below, shall be made to the Development Commissioner, in Form F, in five copies with a copy to the Developer.

The amendment dispensed with the requirement of submission of Form F in five copies.

Along with the form, sales tax registration is required to be submitted.  The amendment now required to submit GST registration certificate in lieu of sales tax registration.

Consideration of proposal

Rule 18 provides the procedure for consideration of proposal for setting up a unit in SEZ.  The amendment inserted new Rule 18(4A) and 18(4B) as detailed below-

(4A)  for existing plastic or used clothing Units in Special Economic Zones:-

(a) Broad banding and splitting of license for setting up of sub-Units shall not be allowed and all transactions of a Unit shall be regulated through a single bank account;

(b) no third party exports shall be allowed by any such Unit;

 (c) all such Units shall set up facilities to make products out of used clothing or plastic waste

(d) 100% inspection of the consignment of used clothing sale to Domestic Tariff Area shall be under taken.

(4B) Procedure to be followed for verification of documents prior to clearing the consignment in Special Economic Zone:-

(a) Each consignment of used clothing imported by the Unit shall be accompanied with certificate from exporter or agency in which it was generated regarding dis-infection and fumigation of the containers from an agency licensed in the country of origin of worn clothing along with import documents;

(b) in case of mis-declaration by any importer in regard to any toxic or hazardous substances, action as per the relevant provisions of the shall be taken against such importer;

(c) to ensure that used clothing re-processing Units in Special Economic Zones fulfill their export obligations in addition to meeting their Net Foreign Exchange obligation and all such Units shall be required to ensure that certain minimum percentage of the Units annual turnover is physically exported out of the country;

(d) before the clearance of used clothes to Domestic Tariff Area, all imported consignments of such used clothes shall be subject to 100 per cent scrutiny at the premises of the Unit by Special Economic Zone authorities.

Rule 18(3) provides that the proposal shall also fulfill the following sector specific requirements, namely-

(a) export of high-grade iron ore, that is sixty-four per cent. Fe and above, except iron ore of Goa origin and Redi origin, which would be subject to approval of Board;

(b) no sub-contracting or job work of polyester yarn shall be permitted in Domestic Tariff Area or in Export Oriented Unit or Units in other Special Economic Zone.

The amendment substituted the above two clauses as below-

(a) export of the goods from Special Economic Zones shall be subject to export policy in force, as provided in Schedule 2 to the Indian Trade Classification (Harmonized System) of Export and Import Items, 2017;

(b) for Gems and Jewellery, the minimum Value Addition earning requirement shall be as specified in the prevailing Foreign Trade Policy or Handbook of Procedures, as amended from time to time

Merger of letters of approval

The amendment inserted a proviso after the third proviso to Rule 19(2).  The newly inserted proviso provides that  the Approval Committee may also approve proposals for merger of Letters of Approval of two or more Units of the same company or firm subject to the condition that these Units fall within the same Special Economic Zone and after merger, block period for calculation of Net Foreign Exchange shall be from the date of commencement of production of the Unit which commenced operation first and the Income tax exemption period shall be considered from the date of start of operation of the first Unit.

Renewal of letter of approval

The amendment inserted Rule 19(6A) and 19(6B).  The newly inserted Rule 19(6A) provides the procedure for renewal of letter of approval. 

(6A)(1) The Units which intend to renew the validity of Letter of Approval shall submit, before two months from the date of expiry of the Letter of Approval, the completed application in form F1 along with requisite document, to the Development Commissioner, duly signed by the proprietor or managing partner or if it is a company, by the Managing Director or the Director(s) or any person who has or have been duly authorized for this purpose by a resolution of the Board of Approval of Directors of the Company:

Provided that in case an application is not submitted before the said period of two months, such application shall be placed before the Approval Committee and the said Committee, if it is satisfied that there was sufficient cause for not filling the same before the said period, may direct for entertainment of such application.

(2) in case of non-compliance of the procedures specified in clause (1), the Letter of Approval shall not be considered for renewal.

(3) the Development Commissioner may renew the Letter of Approval for a period of five years or for a shorter period, in form F 2, based on the evaluation of the Unit as per sub-rule (6B):

The new Rule 19(6B) provides the basis on which the letter of approval shall be renewed.

(6B) The renewal of Letter of Approval shall be based on the evaluation of the following criteria, namely:

(i) Export performance of the Unit in the last block vis-a-vis the initial export projection submitted by the Unit.

(ii) Projected employment with reference to actual employment generated.

(iii) Instance of violation of applicable statutes related to the functioning of the Unit.

(iv) Cases of default, if any, of statutory payments.

(v) Undertaking of any activity not sanctioned or approved by the Development Commissioner.

(vi) The decision of the Development Commissioner or Approval Committee in this regard shall be final and binding on the Unit except in cases where the Unit prefers an appeal before the Board of Approval, in accordance with .

Drawback claim

Rule 24 provides the procedure for grant of drawback claims.  The amendment omitted Rule 24(1)(b) in relation to ‘duty entitlement pass book credit’.  Further the amendment substituted Rule 24(2) and 24(3) as under-

(2)Where a Bill of Export has been filed under a claim of drawback or any other similar scheme laid down under the Customs and Central Excise Duties Drawback Rules, 2017, as amended from time to time, the Unit or Developer shall claim the same from the Specified Officer and in case the Unit or Developer does not intend to claim such benefit, a disclaimer to this effect shall be given to the Domestic Tariff Area supplier for claiming such benefits:

Provided that the aforesaid benefits may be claimed by Domestic Tariff Area supplier from their jurisdictional Goods and Services Tax or Central Excise Commissioner, as the case may be.

(3) Drawback or any other similar benefit under the Customs and Central Excise Duties Drawback Rules, 2017, as amended from time to time, against supply of goods by Domestic Tariff Area supplier shall be admissible where payments for the supply are made from the Foreign Currency Account of the Unit:

Provided that the reimbursement of duty in lieu of drawback or any other similar benefit scheme against supply of goods by Domestic Tariff Area supplier to Special Economic Zone developers shall be admissible even if payment is made in Indian Rupees and reimbursement of duty in lieu of drawback or any other similar benefit against supply of goods to Special Economic Zone developer shall be made as per the procedure specified by the Central Government under the Customs and Central Excise Duties Drawback Rules, 2017, as amended from time to time.

General conditions of import and export

The amendment inserted fifth and sixth provisos to Rule 26.  The newly inserted fifth proviso provides that Special Economic Zone Units shall be permitted to export prohibited items, if they import raw-material for the same, but each such case shall be placed before Board of Approval for approval:

The newly inserted sixth proviso provides that items which are prohibited for import, Special Economic Zone Units shall be permitted to import the same if they export goods made out of the same but each such case shall be placed before Board of Approval of Approval for approval.

Import and procurement

The amendment inserted fourth and fifth provisos to Rule 26(1).  The newly inserted fourth proviso provides that for supply of Restricted Items by a Domestic Tariff Area Unit to Special Economic Zone Developer or Unit, the Domestic Tariff Area Unit may supply such items to a Special Economic Zone Developer or Unit for setting up infrastructure facility or for setting up of a Unit and it may also supply raw material to Special Economic Zone Unit for undertaking a manufacturing operation except refrigeration, cutting, polishing and blending, subject to the prior approval of Board of Approval.

The newly inserted fifth proviso provides that supplies from Domestic Tariff Area to Special Economic Zones shall attract export duty, in case, export duty is leviable on items attracting export duty.

Procedure for procurement from DTA

The amendment substituted the existing Rule 30(1) for a new one.  The newly substituted provision of 30(1) provides that the Domestic Tariff Area supplier supplying goods or services to a Unit or Developer shall clear the goods or services, as in the case of zero-rated supply as per provisions of section 16 of the Integrated Goods and Services Tax Act, 2017 either under bond or legal undertaking or under any other refund procedure permitted under Goods and Services Tax laws or Central Excise law, or as duty or tax paid goods under claim of rebate, on the cover of documents laid down under the relevant Central Excise law for the purpose of export by a manufacturer or supplier.

Rule 30(4) is also substituted for a new one which provides that a copy of the document referred to in sub-rule (1) or copy of Bill of Export, as the case may be, with an endorsement by the authorized officer that goods have been admitted in full into the Special Economic Zone shall be treated as proof of export and a copy with such endorsement shall also be forwarded by the Unit or Developer to the Goods and Services Tax or Central Excise Officer having jurisdiction over the Domestic Tariff Area supplier within forty-five days failing which the Goods and Services Tax or Central Excise Officer, as the case may be, shall raise demand of tax or duty against the Domestic Tariff Area supplier.

The amendment omitted the provisions of Rule 30(5), 30(8), 30(9).

Omission of Rules 31 and 32

The amendment omitted the provisions of Rule 31 which provides for exemption from service tax and Rule 32 which provides for exemption from Central Sales Tax.

Utilization of goods

The amendment substituted a new proviso for the proviso to the Rule 34 which provides that  in case a Unit is unable to utilize the goods or services imported or procured from Domestic Tariff Area, it may, -

(i) export the goods; or

(ii) sell the same to other Unit or to an Export Oriented Unit or Electronic Hardware Technology Park or Software Technology Park or Bio Technology Park, without payment of duty; or

(iii) sell to an Export Oriented Unit or Electronic Hardware Technology Park or Software Technology Park or Bio Technology Park –

(a) on payment of Integrated Goods and Services Tax as applicable under  of the  and

(b) without payment of duty of customs leviable thereon under the to the  and additional duty, if any, leviable thereon under  of the  and such sale shall also be made without payment of integrated tax and compensation cess leviable thereon under of the  as per notification issued by the Department of Revenue and such exemptions, as applicable;

(iv) dispose of the same in the Domestic Tariff Area on payment of applicable duties or taxes on the basis of an import licence submitted by the Domestic Tariff Area buyer, wherever applicable.

Amendment of Rule 42

The amendment omitted Rule 42(1)(v).  It also amended Rule 42(5) and the amended rule provides that waste, scrap or remnants generated during processes at the sub-contractor's premises may either be returned to the Unit or may be cleared on payment of an amount equal to the duty applicable on imports as if the said waste or scrap or remnants have been cleared by the Unit or may be destroyed at the sub contactor’s premises in the presence of jurisdictional Goods and Services Tax Officer if the sub-contractor is a Goods and Services Tax registrant.

Sub contracting for DTA unit for export

Rule 43 provides conditions to undertake sub contract for export on behalf of a DTA by a Unit. 

The amendment inserted proviso to Rule 43 which provides conditions for employment as below-

• only employees temporarily in-capacitated, employees travelling and off-site employees of Special Economic Zones may be permitted to work from home or from place outside the Special Economic Zone subject to the following conditions, namely:

• the person shall be an employee of the Special Economic Zone Unit;
• the person shall carry out the work related to a project of the Special Economic Zone Unit;
• the Unit shall ensure export revenue of the resultant products or services to be accounted for by the Special Economic Zone Unit to which the employee is tagged and in no case the export of services, involving work from home, shall be made from outside the Special Economic Zone Unit.

•  Information Technology and Information Technology enabled Services Units in Domestic Tariff Area shall carry out their job-work in a Special Economic Zone Unit by following the procedure as laid down above.
• For the purpose of work from home, Special Economic Zone Unit shall provide laptop or desktop and secured connectivity viz., VPN, VDI etc. to establish a connection between the employee and the work related to the project of the Special Economic Zone Unit.
• Once the employee ceases to be part of the project of Special Economic Zone Unit, the employee shall be untagged from the respective Special Economic Zone Unit and the Unit shall surrender the permanent Identity- Card issued in Form K to the Specified Officer as per of rule 70(2).
• For Special Economic Zone Units registered as Other Service Providers with Department of Telecommunication and availing the benefit of work from home, the laid down Other Service Providers guidelines issued by that Department as amended from time to time, shall be followed by the Special Economic Zone Units.

Procedure of export

Rule 46 provides the procedure of exports.  The amendment brought out the following changes in respect of this rule.

• The proviso to Rule 46(1)(a) provides that there is exemption from filing declaration in respect of export value up to US$ 25000 or for export value as may be notified by the Reserve Bank of India, from time to time.The amendment now provides the exemption from filing declaration for export value as may be notified by RBI from time to time.
• The amended Rule 46(1)(C) provides that the goods shall not be subjected to routine examination and 'Let Export Order' shall be given on the basis of self certification by the Unit, however, in case Merchandise Exports from India Scheme benefit is claimed then examination of export cargo shall be done as per examination norms set by Central Board of Indirect Taxes and Customs.
• The amendment substituted new Rule 46(12)(i) for the new one.The newly substituted rule provides that  the receiving Export Oriented Unit or Electronic Hardware Technology Park Unit or Software Technology Park Unit or Biotechnology Park Unit shall file Bill of Entry for home consumption, in quintuplicate along with invoice, copy of information as provided to jurisdictional customs officer under rule 5 of the Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017 and packing list with the Authorized Officer along with copy of the Letter of Approval and bonding licence.

Net foreign exchange

The amendment substituted new rule for the existing Rule 53.  The newly substituted rule provides that the Unit shall achieve Positive Net Foreign Exchange to be calculated cumulatively for a period of five years from the commencement of production according to the following formula, namely:-

            Positive Net Foreign Exchange = A - B > 0

Where, -

A - is Free on Board of Approval value of exports, including exports to Nepal and Bhutan against freely convertible currency, by the Unit and the value of following supplies of their products, manufactured in the Special Economic Zone and the value of the services (excluding traded goods), namely:

• supply of goods against Advance Authorization or Advance Authorization for annual requirement or Duty Free Import Authorization under the Duty Exemption or Remission scheme under the Foreign Trade Policy;
• supply of capital goods to holders of licence under the Export Promotion Capital Goods Scheme under the Foreign Trade Policy;
• supply of goods to projects financed by multilateral or bilateral agencies or funds as notified by the Department of Economic Affairs, Ministry of Finance, from time to time, under International Competitive Bidding in accordance with the procedures of those agencies or funds, where the legal agreements provide for tender evaluation without including the customs duty;
• supply of goods to any project or for any purpose in respect of which the Ministry of Finance notifies from time to time, permitting import of such goods at zero customs duty subject to conditions specified in the above said notification provided the supply is made under procedure of International Competitive Bidding.
• supply of goods to United Nations or International Organizations for their official use or supplied to the projects financed by the said United Nations or an International Organization approved by Government of India and the list of such organizations and conditions applicable to such supplies is notified by Ministry of Finance from time to time;
• supply of goods to nuclear power projects provided they are as per the conditions stipulated in Foreign Trade Policy;
• supply against special entitlements of duty free import of goods under the Foreign Trade Policy;
•  export of services by services Units including services rendered within Special Economic Zone or such services rendered in Indian Rupees which are otherwise considered as having been paid for in free foreign exchange by the Reserve Bank of India;
• supply of Information Technology Agreement items and notified zero duty telecom or electronic items, namely, Colour Display Tubes for monitors and Deflection components for colour monitors or any other items as may be notified by the Central Government;
• supply to other Units and Developers in the same or other Special Economic Zone or Export Oriented Unit or Electronic Hardware Technology Park or Software Technology Park Unit or Bio-technology Park Unit provided that such goods and services are permissible for import or procurement by such Units and Developers;
•  supply of goods against free foreign exchange by a Free Trade and Warehousing Zone Unit.

Explanation. - For removal of doubts, it is hereby clarified that the supplies under clause (j) shall be against procurement certificate, as applicable and the supplies under clauses (d) to (g) shall be as per the terms and conditions of the respective duty exemption as notified by the Central Government, in the Ministry of Finance.

B - consists of sum of the following-

• sum total of the Cost Insurance and Freight value of all imported or indigenous inputs used for authorized operations during the relevant period and the Cost Insurance and Freight value of all imported capital goods including goods purchased on high seas basis even though paid for in Indian Rupees and the value of all payments made in foreign exchange by way of export commission, royalty, fees, dividends, interest on external commercial borrowings during the first five year period or any other charges;
• value of goods obtained from other Unit or Export Oriented Unit or Electronic Hardware Technology Park or Software Technology Park Unit or Bio-technology Park Unit or from bonded warehouses or procured from international exhibitions held in India or precious metals procured from nominated agencies;
• the Cost Insurance Freight value of the goods and services, including pro-rata Cost Insurance Freight of capital goods, imported duty free or leased from a leasing company or received free of cost or on loan basis or on transfer for the period they remain with the Unit.

Explanation. - For this purposes the expression “inputs” mean raw materials, intermediates, components, consumables, parts and packing materials;

• for annual calculation of Net Foreign Exchange, value of imported capital goods and lump sum payment of foreign technical know-how fee shall be amortised at the rate of ten per cent. every year from the first year to the tenth year;

C- Gems and Jewellery Units shall achieve minimum Value Addition as laid down in prevailing Foreign Trade Policy or Hand Book of Procedures the Nominated Agencies working as a service Unit for precious metals supply within Special Economic Zone shall be subjected to the requirement of positive Net Foreign Exchange only; and

D -  For Gems and Jewellery, the minimum Value Addition shall be in terms of prevailing Foreign Trade Policy or Hand Book of Procedures and it shall be calculated as under:-

VA = A-B/B x 100

Where, -

A = Free on Board value of the export realised or Freight on Road and Rails value of supply received;

B = Value of inputs (including domestically procured) such as gold or silver or platinum content in export product plus admissible wastage along with value of other items, such as gemstone etc. wherever gold has been obtained on loan basis, value shall also include interest paid in free foreign exchange to foreign supplies:”;

Provided that where a Unit is unable to achieve Net Foreign Exchange due to adverse market conditions or any ground of genuine hardship having adverse impact on functioning of the Unit, the five years block period for calculation of Net Foreign Exchange earnings may be extended by the Board of Approval for a further period of upto one year, on a case to case basis.

Exit of units

The amendment inserted sub-clause (6) to Rule 74 which provides that the Unit opting out from Special Economic Zone shall execute a legal undertaking in Form L.

Self declaration

The amendment inserted a proviso to Rule 75 which provides that all the consignments of Special Economic Zone shall be subject to a risk management system.

Regularization of shortfall

The amendment inserted Rule 80 which provides that if a Special Economic Zone Unit, in case of bona fide default, fails to achieve the minimum specified Net Foreign Exchange or specified value addition, then such shortfall may be regularized after the Unit deposits an amount equal to one per cent. of shortfall in Free on Board of Approval Value.

New Forms

The amendment introduced the following new forms-

• Form F1 – Letter of approval/renewal application form;
• Form F2 – Format for renewal of letter of approval for unit;
• Form L – Form of legal undertaking for exit of the unit from special economic zone scheme.