SEZs or special economic zones are specified areas notified as SEZs, where businesses that satisfy certain criteria are entitled to benefits including customs duty, income tax, goods and services tax. Such benefits were not available to businesses located outside the SEZs, which were referred to as Domestic Tariff Areas or DTAs. When originally introduced, the special economic zones attracted several businesses. With time however, these benefits were extended to all locations and the attractiveness of being in an SEZ waned.
Recently, the government has issued a notification permitting such SEZs to operate partially as SEZs and partially as DTAs.
This notification dated December 6, 2023, permitting developers of IT/ ITES SEZs to seek demarcation of a portion of the total built-up area as non-SEZ area has significant importance. It is also well timed, given the little continuing benefit from SEZs, and should be a win-win for developers and tenants. Floor-wise basis denotification will result in developers and IT/ ITES companies and GCCs having both (SEZ and Domestic Tariff Area) options to provide/ choose from. Developers will likely see higher occupancy, and tenants can choose separate premises for their business within the same building for export as well as DTA operations. Previously since an entire building would be notified as an SEZ, a company requiring office space for both SEZ and DTA operations could not have premises in the same building. The floor wise denotification now makes that possible.
The current notification (i.e. Special Economic Zones (Fifth Amendment) Rules, 2023) introduces a new Rule 11B to the Special Economic Zones Rules, 2006 to the Special Economic Zones Act, 2005.
While the Amendment Rules are a welcome change, there are specific conditions that are stipulated for availing the benefit of the floor-wise denotification.
1. Access control: The Amendment Rules stipulate that there should be appropriate access control mechanisms in place for SEZ units, and businesses engaged in IT/ ITES services in non-processing areas of IT/ ITES SEZs, since the same building would have both SEZ and non-SEZ businesses. Also, there has to be adequate screening of movement of persons as well as goods in and out of the premises.
2. Repayment of tax benefits by developer: A developer can make an application to the Board of Approval for partial denotification as permitted under the Amendment Rules. The Board of Approval will consider the application and permit demarcation of a non-processing area, only after the Developer has repaid the tax benefits already availed as an SEZ. Accordingly, the developer will be required to repay not only the proportionate tax benefits attributable to the non-processing area but also the tax benefits for creation of social/ commercial infrastructure and other facilities if such infrastructure and facilities are proposed to be used by both the SEZ and the non-SEZ units. The amount to be repaid by the Developer will be based on a certificate issued by a chartered engineer.
Given the repayment obligation of tax benefits availed, developers will certainly weigh the overall benefits of higher occupancy while considering the cost of repayment of benefits.
3. Minimum area requirements: An application for demarcation of a non-processing area should ensure that it does not result in decreasing the processing/ SEZ area to less than 50% of the total area. Further there are also minimum area stipulations depending upon the location of the property, which will have to be adhered to.
The intent of these stipulations seems to be that at least a half of the total area or the specified minimum area continues as an SEZ.
Partner
JSA
4. No tax benefits for SEZ units for common infra: Post denotification of an SEZ area into non-SEZ area, businesses engaged in such non-SEZ area cannot avail any rights or facilities available to SEZ units. Similarly, no tax benefits will be available on operation and maintenance of common infrastructure and facilities of such an IT/ ITES SEZ.
While developers may argue that similar to the proportionate repayment of tax benefits, the benefits of common infrastructure and facilities should also continue proportionately for SEZ units, the intent may have been to not complicate the process of computation on a going forward basis.
Prior to this notification, an SEZ status was a catch-22 situation for developers who were caught between the SEZ status and the diminishing attractiveness of the same.
With commercial real estate being in favour with the investor community, these changes should help add some cheer to all stakeholders in the new year.
