Department of Commerce issues clarification on newly inserted Rule 11B of SEZ Rules

This Tax Alert summarizes a recent instruction1 issued by the SEZ Division, Department of Commerce, clarifying various concerns relating to Rule 11B of the Special Economic Zone (SEZ) Rules, 2006. The said rule provides for setting up of non-SEZ Information Technology (IT)/ IT Enabled Services (ITES) units in IT/ITES SEZs.

The key clarifications are: 

• Demarcation of non-processing area (NPA) is permitted only after repayment of the tax benefits that were originally availed. 
  
• Demarcation of NPA shall not be allowed if it results in decreasing the processing area to less than 50% of the total area or less than the area specified in rule 11B(7). 
• Rule 49 would be applicable for clearance of plant and machinery pertaining to rule 11B(5)(i). For common social or commercial infrastructure covered under Rule 11B(5)(ii), benefits taken if any, will have to be repaid.
• No repayment of benefits is required where basements and other facilities are used exclusively by SEZ units, provided such demarcation is possible and permitted in terms of SEZ Rules, 2006.
• Common built-up infrastructure and amenities such as cafeteria, hubs, etc will attain dual usage status as provided under rule 11A(1) on repayment and surrender of tax benefits.
• The tax benefits already availed on goods & services used/ consumed for operation & maintenance of the SEZ are not required to be repaid. 
• The tax benefits to be repaid includes customs duties, central excise duty, CGST, IGST and SGST and such other central levies and tax benefits availed by the developer. 
• NPA units are not entitled for any right / privileges under SEZ law and would be subject to GST or any other law, as are applicable.

Comments

• The Instruction addresses a lot of doubts arising out of demarcation of NPA in SEZ. It may facilitate ease of compliance for SEZ developers.
  
• While the Instruction clarifies that the benefits are required to be repaid in full, SEZ developers may represent to seek the repayment at depreciated value since the goods/ P&M have been used solely by the SEZ processing area till demarcation.
• It may be important to analyze the documents basis which tax benefits will be repaid and whether such tax can be claimed as input tax credit under GST basis the tax repayment documents. 
• The requirement of obtaining separate GST registration by the developers for non-processing area as regular DTA registration and not SEZ will need to be evaluated.

[1] Instruction No. 115 dated 9 April 2024