EPCES CIRCULAR NO.8 DATED L.B. Singhal Director General SUB : HIGHLIGHTS OF SEZ RULES 2006

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1 EXPORT PROMOTION COUNCIL FOR EOUs & SEZ UNITS (Ministry of Commerce & Industry, Government of India) 705, BHIKAJI CAMA BHAVAN, BHIKAJI CAMA PLACE, NEW DELHI TEL : , , FAX: , epces@vsnl.net L.B. Singhal Director General EPCES CIRCULAR NO.8 DATED SUB : HIGHLIGHTS OF SEZ RULES 2006 The SEZ Act, 2005 was enacted by the Government of India in June For making SEZ Act operational, draft SEZ Rules were prepared by Ministry of Commerce and the same were circulated to all member units. A large number of suggestions received from members on these draft rules were considered by the Ministry of Commerce. Now SEZ Rules have been announced and SEZ Act alongwith SEZ Rules have become operational from 10 th February SEZ Act and SEZ Rules are available on the website In the SEZ Rules, certain changes have been affected for simplifying the procedures further. I am giving details of some of these provisions which are different from the existing provisions/practices. These are as follows:- i) Rule 2(c) gives the definition of Authorized Officer. ii) Rule 2(e) Definition of Capital Goods has been expanded to include capital goods required for development of SEZ, including those required for construction activities. iii) Rule 2(g) Definition of Consumable has been expanded and now the consumable will include fuel, high speed diesel oil, light diesel oil and other such petroleum products. iv) Rule 2(s) The definition of Infrastructure in the SEZ Act was given in Section 2(p). This definition has been expanded in detail in Rule 2(s) of SEZ Rules. v) Rule 2(z)(d) gives the definition of Specified Officer. vi) Rule 2(4) now for setting up of a SEZ, application can be made either through the state government or the application can be made directly to the Board of Approval. vii) Rule 5(2) laid down the minimum are requirement for development of SEZ as under:- a) Multi product SEZ 1000 hectare b) Service SEZ 100 hectare c) Sector specific/port based/airport based SEZ 100 hectare except the following:- (a) Electronic Hardware & Software 10 hectare + built up information technology enabled services (b) Bio-technology, non-conventional energy 10 hectare solar energy equipments/cell, or gem & jewellery sectors processing area of one lakh square meters. c) SEZ for Free Trade Warehousing 40 hectare + built up area of not less than one lakh square meters.

2 -: 2 :- e) For specified States (Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttranchal, Sikkim, Jammu and Kashmir, Goa or in a Union Territory. (i) Multi Product SEZ (ii) Sector Specific SEZ 200 hectare 50 hectare The area required shall be contiguous area. However, in respect of multi product SEZ Rule 5(2)(a) has made a proviso that the fulfillment of the requirement of the contiguous area shall be considered and decided by the Board on a case to case basis on merits. viii) Rule 5(4) Developer or Co-developer shall have atleast 26% of the equity in the entity proposing to create business, residential or recreational facilities in a SEZ. ix) Rule 5(5)(a) has sought a commitment from the state Government for providing exemption from the state or local taxes, levies and duties including stamp duty on goods required for authorized operations by a unit or developer and the goods sold by a unit in DTA. x) Rule 5(5)(h) has made a provision for providing single point clearance system to the developer and the unit under the State Acts and Rules. xi) Rule 9 Developer is required to submit to the Board of Approvals the details of operations proposed to be undertaken in the SEZ. xii) Rule 10 Once operations are approved by Board of Approval, then the further approval for goods and services required for these operations is to be taken from the Approval Committee. A proviso has been incorporated in Rule 10 that exemption, drawback and concessions allowed to a developer or co-developer shall also be available to the contractor appointed by such developer or co-developer. xiii) Rule 11 Development Commissioner of the SEZ shall be the authority for demarcating the processing, non-processing area etc in the SEZ. xiv) Rule 11(3) The requirement of boundary wall or wire mesh fencing etc is to be ensured by the Development Commissioner now. xv) Rule 11(5) The land or built up space in the processing area or FTWZ can be given on lease only to the entrepreneur holding a valid Letter of Approval. xvi) Rule 11(sub Rule 11) SEZ shall be deemed to be a port, airport, inland container depot, land customs station etc. In case these facilities are to be used for cargo meant for DTA units as well, storage for such cargo shall be in a separate enclosure. xvii) Rule 12 The procedure for import and procurement of goods by the Developer is given in Rule 12. The developer is required to execute bond-cum-legal undertaking jointly with the Development Commissioner and specified officer. Goods are to be utilized by the developer within a period of 1 year. xviii) Rule 17 A consolidated application seeking permission for setting up of a unit and other clearance as mentioned in this Rule 17 is to be made to the Development Commissioner in 5 copies. Hence even for state related permission required the application is to be given to the Development Commissioner. This is a very important provision to ensure clearance at one place. Even permission for subcontracting can be taken on annual basis at the time of making the application for setting up a unit itself as per Rule 17(1)(b). xix) Rule 18(4) no proposal shall be considered for recycling of plastic scrap or waste provided that extension of Letter of Approval for a existing unit shall be decided by the Board.

3 -: 3 :- xx) Rule 18(5) all transaction by a unit in FTWZ shall only be in convertible foreign currency. xxi) Rule 18(6) Unit can also be set up for providing service or manufacturing service to overseas entities as per the procedure given in this rule. This is a new facility incorporated in the SEZ Rules. xxii) Rule 19(2) Letter of Approval for manufacturing or service activities including trading or warehousing shall be a common Letter of Approval. xxiii) Rule 19(4) Letter of Approval shall be valid for one year for commencing production which can be extended further by Development Commissioner for a period of 2 years. Further extension can be granted only for one year subject to the condition that 2/3 rd of activities of the unit is complete. xxiv) Rule 19(7) If an entrepreneur is operating both as a DTA unit as well as a SEZ unit, it shall have 2 distinct identifies with separate books of accounts, but it shall not be xxv) necessary for the SEZ unit to be a separate legal entity. Rule 22 The unit is required to execute a Bond-cum-Legal Undertaking in Form H given in SEZ Rules and this shall be jointly accepted by the Development Commissioner and by the specified officer. No bank guarantee is required to be given. xxvi) Rule 22(iv)(b) The value of the Bond-cum-Legal Undetaking shall be equal to the amount of the effective duties, leviable on import or procurement from the DTA of the projected requirement of capital goods, raw materials, spares, consumables, intermediates, components, parts, packing materials for 3 months. Hence Bond-cum- Legal Undertaking will be for the full amount of customs duties. This has been done to cover the entire duties foregone but simultaneously no cost is involved as such to the SEZ unit as it is not to be backed by a bank guarantee. xxvii) Rule 22(iv)(d) There shall be no debit and credit. The Bond-cum-Legal Undertaking amount shall be monitored quarterly for the Developer and yearly for the SEZ units based on QPR or APR respectively. In case of any shortfall in Bond-cum- Legal Undertaking amount, a fresh or additional Bond-cum-Legal Undertaking shall be furnished. xxviii) Rule 22(iv)(g) Duly completed Bond-cum-Legal Undertaking shall be deemed to have been accepted if no communication is received within seven working days from the date of its submission. xxix) Rule 22(2) Every unit and the Developer shall maintain records as given in this paragraph for a period of 7 years, from the end of relevant financial year. SEZ unit, engaged both in manufacturing and trading activities, shall maintain separate records for trading and manufacturing activities. xxx) Rule 22(3) The unit is required to submit APR in the Form 1. Hence the requirement of submitting QPR has been done away with. This is again a major simplification. xxxi) Rule 22(4) SEZ Developer is required to submit QPR. xxxii) Rule 24(1)(a) Specified officer shall be the disbursing authority for the claims. xxxiii) Rule 24(2) An application for DEPB by a SEZ unit or SEZ Developer to be made to the Development Commissioner. However, in case domestic supplier wants to claim then it has the option of claiming from Regional Licensing Authority of DGFT or the Development Commissioner. xxxiv) Rule 27(3) Import of duty free material for setting up of social and commercial infrastructure in non-processing area is permitted but import of no duty free material shall be permitted for operation and maintenance of such facility.

4 -: 4 :- xxxv) Rule 27(8)No import or export of rough diamonds shall be permitted unless the shipment parcel is accompanied by Kimberley Process Certificate issued by the Development Commissioner. Hence a major request of the SEZ unit of getting the certificate issued from the Development Commissioner office instead of Export Promotion Council for Gems & Jewellery has been accepted. xxxvi) Rule 27(10) Assessment of import of domestic procurement by a Developer or a unit shall be on the basis of self declaration and shall not be subjected to routine examination except in case of procurement from the DTA under the claim of export entitlements. xxxvii) Rule 28(5) The goods imported by the unit or the Developer shall be allowed to be transferred from the port or airport to the SEZ without examination by the Customs Authorities at the port or airport, as the case may be. xxxviii) Rule 29(2) The procedure for import is given in this paragraph and the procedure has been simplified considerably. This procedure may please specifically be seen in this paragraph. xxxix) Rule 29(2)(h)(i) under this sub-rule, a provision has been made that if SEZ importer is not able to get the courier parcel duty free, the duty paid by the said importer shall be refunded by the specified officer. I hope that this will take care of the problem of import of parcel through courier by SEZ unit. xl) Rule 29(6) For the import of computer software or services through data communication or telecommunication links, the unit shall file consolidated Bill of Entry for a month within three working days of the closer of the month. xli) Rule 29(7)- Re-import of the goods exported earlier has been allowed within the warranty period or the validity of the maintenance contract or for a period of one year from the date of export, whichever is later. This will also take care of a number of requests which has been received from our SEZ units on this facility. xlii) Rule 30 Rule 30 prescribes the procedure of procurement from DTA. This procedure has been simplified considerably based on the inputs received from our SEZ Unit, specifically units from Noida SEZ. This procedure in detail may be seen in this paragraph. The unit or Developer have been permitted to procure goods from DTA without availing exemption, drawback and concession on the basis of invoice or xliii) transportation document issued by the supplier. Rule 30(8) Drawback or DEPB credit against supply of goods by DTA supplier shall be admissible provided payment for the supply are made from the foreign currency account of the unit. xliv) Rule 30(15)(v) Inter-unit transfer of the goods within the same SEZ has been simplified considerably and the movement of the goods shall be allowed and such transactions shall be recorded in the regular Books of Accounts of the receiving unit or the Developer and the supplying unit and no Bill of Entry shall be required to be filed. xlv) Rule 30(16) The procedure for procurement of cut and polished diamonds and precious and semi precious stones from DTA has been simplified as given in this rule. xlvi) Rule 31 This rule has provided exemption from payment of service tax on taxable services rendered to a Developer or a unit by any service provider for the authorized operation in a SEZ. This is a major change because as per the existing provision, service tax exemption is provided only for the services consumed within the SEZ. xlvii) Rule 37 Goods have to be utilized by the SEZ unit within the validity period of LoA and in case of Developer, within a period of one year.

5 -: 5 :- xlviii) Rule 39(1) Destruction of goods within the SEZ has been allowed after advance intimation to the specified officer. Hence physical presence of the specified officer is not required. However, if destruction is to be carried out outside the SEZ then it can be carried out with the permission of the specified officer and in the presence of the authorized officer as per Rule 39(2). xlix) Rule 41 lays down the procedure for sub-contracting and the procedure for subcontracting has been simplified. A prior permission of the specified officer can be taken on annual basis. Goods taken out for sub-contracting have to be brought back within 120 days or within such period as may be extended. Rough diamonds have been allowed to be taken out for sub-contracting. l) Rule 41(1)(c) Gems & Jewellery units have been allowed exchange of gold or silver or platinum jewellery after adjusting permissible wastage or manufacturing loss allowed under the provisions of Foreign Trade Policy. li) Rule 41(1)(h) Moulds, jigs or tools etc have been allowed to be taken to the premises of sub-contractor till the period of sub-contracting arrangements. A quarterly verification report is to be submitted from Central Excise Officer. lii) Rule 42(d) While taking the goods out for sub-contracting, the unit is required to furnish bank guarantee to specified officer to cover the duty foregone on such materials being taken out. However, no bank guarantee is required by a unit whose turn over is Rs. 1 crore or above or where the unit is in the SEZ for a period of more than 2 years with an unblemished track record. liii) Rule 42(f) & (g) while taking out the goods samples is to be drawn and retain only for sensitive items which are sent out for sub-contracting, based on the risk profile or past performance of the unit. In case of Gems & Jewellery units there has been no requirement of drawal of samples. liv) Rule 43 A unit can do sub-contracting for DTA unit for export on the basis of annual performance from the specified officer. lv) Rule 44 A unit engaged in production or processing of agriculture or horticulture products, can remove goods given in this rule for contract farming on the basis of the annual permission from the specified officer. However, the unit is required to give bank guarantee equivalent to the duty foregone to the specified officer if unit has not been in existence for 2 years. lvi) Rule 46 Rule 46 gives the procedure for exports and the procedure has been simplified considerably. Sub-clause (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. lvii) Rule 46(2) Prescribes the procedure for export of gems & jewellery items and Rule 46(3) provides the procedure for export of software. lviii) Rule 46(6)(viii) Personal carriage of spare parts by foreign bound passenger has been allowed now. The procedure for personal carriage of goods by authorized passengers is given in Rule 46(6)(ix) and the procedure for personal carriage of gems & jewellery is given in Rule 46(6)(x). lix) Rule 46(9) The procedure for export of goods including gems & jewellery for display or participation in exhibitions abroad is given in this rule. lx) lxi) Rule 47 Broken Diamonds have been permitted to be removed in DTA. Rule 50 provides procedure for temporarily removal to the DTA. Rule 50(3) provides that if the goods are removed for testing, research and development etc have been consumed or destroyed in the process of testing then a certificate to this effect is to be given from the laboratory.

6 -: 6 :- lxii) Rule 53 Significant changes have been carried out in Rule 53 for discharge of NFE. These are as follows:- a) Rule 53(k) provides that service rendered by the Service unit in the DTA and paid for in free foreign exchange or such services rendered in Indian rupees which are otherwise considered as having been paid for in free foreign exchange by RBI shall be counted for NFE. b) Rule 53(n) provides that supplies of goods to DTA against payment in foreign exchange from the EEFC account of the DTA buyer or free foreign exchange received from overseas shall be counted for NFE. Hence SEZ Rules have accepted a major demand of the SEZ units. c) Rule 53(o) provides that supply of goods against free foreign exchange by a FTWZ unit shall be counted for NFE. lxiii) Chapter 7 prescribes a procedure for appeal against the rejection of the Unit Approval Committee. This entire procedure is a new addition to the SEZ Scheme. lxiv) Rule 75 Rule 75 is a omnibus clause and provides as follows:- Self Declaration.- Unless otherwise specified in these rules all inward or outward movement of goods into or from the Zone by the Unit or Developer shall be based on self declaration made and no routine examination of these goods shall be made unless specific orders of the Development Commissioner or the Specified Officer are obtained. This is a very important provision for the operation of the entire SEZ Scheme. lxv) Rule 76 Rule 76 provides the list of services which are permissible under SEZ. This list of the services include specifically Trading also. As per Section 10AA of the SEZ Act as given in the Second Schedule of the Act, income tax exemption is available for export of goods manufactured or article produced or for providing any service. The list of the services permissible is given in Rule 76. Hence Rule 76 brings about a significant change for encouraging export of services from SEZ. lxvi) Form F is a consolidated application form. In the application proforma also significant simplifications have been carried out. For instance in column 11, the details of foreign exchange outgo, columns have been reduced to only 3 columns and a number of entries have bee done away with. Hence I believe that with the operationalization of the SEZ Act and formulation of the SEZ Rules considerable simplification in procedures would be affected and SEZ as an instrument for export promotion would play a significant role in employment generation, creation of infrastructure and increasing exports in the times to come.