We have made a representation to Ministry of Commerce and Industry (MoCI) highlighting the following operational and procedural issues being faced by units in Special Economic Zones (SEZ):
- Introduction of virtual identity cards by units operating in SEZ
- As per S. 46 of Special Economic Zones Act, 2005 (SEZ Act), every person employed in SEZ shall be provided an identity card by Development Commissioner of the SEZ. Rule 70 of Special Economic Zones Rules, 2006 (SEZ Rules) prescribed the procedure for issuance of physical id-cards to the employees of SEZ units. The manual identity card is issued by filing Form-K and is valid for five years. In case, the employee ceases to be in employment of the SEZ unit, the identity card is required to be surrendered forthwith and is deemed invalid from such date.
- For this, SEZ units are required to prepare and continuously update its employee database, print SEZ cards, distribute them to the employees, follow up for surrender of id-cards in case of cessation of employment. The units are also required to submit details of each employee in prescribed format to the SEZ authorities for physical stamping.
- Manually doing this task for a large number of employees is a huge compliance burden. Even in zones where digital id-cards are being adopted, it is still an onerous task as it requires uploading of data manually and approval mechanism is time consuming. Further, different procedures and formalities relating to issuance of id- card is being followed by different zonal SEZs, e.g. - PVC card, ID proof, address proof, application format, etc. This becomes a challenge specifically for companies in IT-BPM sector where the attrition rate is quite high.
- Physical ID cards are susceptible to damage, loss, and theft, posing a security risk to both the SEZ unit and the individual cardholder. Replicating or tampering with cards is also a concern causing inconvenience to both the SEZ unit and cardholders.
Recommendation #1
We have requested the government to introduce the concept of virtual id- cards in SEZ which is accessible to employees of SEZ units on company’s mobile application. This will be a digital and eco-friendly id-card that will mitigate the concerns existing in a manual/hard copy id-card. As the information required on id-card would be linked with company’s database, there would be no requirement to manually check for new joiners, transfer cases, or quitting employees. The whole process would be in real time sync with company database and companies would be able to save on the huge administrative costs and efforts involved in printing and distribution of id-cards to employees. In terms of reporting, SEZ Unit can submit a report on issuance, surrender of ID cards on a periodic basis as deemed fit by the SEZ authorities. This will promote ease of doing business for units in SEZ.
- Depreciation period for goods other than computers should be changed
- Rule 49 of SEZ Rules provides that a unit may remove capital goods to Domestic Tariff Area (DTA) after use in SEZ on payment of duty on the depreciated value of the goods. Further, the rules also prescribe depreciation rates in respect of computer and computer peripherals as well as other capital goods. Accordingly, computers and computer peripherals have a useful life of 4-5 years while networking equipment (which are classified as other capital goods) have a useful life of 8-9 years. However, feedback from industry suggests that the actual lifecycle of networking equipment is similar to that of computers.
- We have highlighted that Rule 49 (relating to depreciation) has been a part of SEZ legislation since the time of introduction of SEZ Act and rules (i.e. in 2005/ 2006). At that time, tech companies primarily focused on software development and call center services, relying mainly on laptops, desktops, and servers. However, with advent of technology, the companies are now offering a wider range of services beyond software development and call centers, which require sophisticated equipment such as servers, outers, networking cable, etc.
- Networking equipment such as routers, racks, switches, networking cables, etc. have the same level of technological erosion as that of computers. This is due to rapid advancements in network technologies and the increasing integration of computing and networking systems. The operating systems, software and hardware design of computers as well as networking equipment are reaching convergence points from a technical standpoint after the introduction of 3G, 4G and 5G technology. Hence, networking equipment will have to be replaced within 4-5 years.
- In the context of Indian Income Tax Act, 1961, Delhi High Court, in case of CIT v. BSES Yamuna Powers Ltd. [2013] 40 taxmann.com 108 (Delhi), observed that computer accessories and peripherals such as printers, scanners, NT server, UPS etc. form an integral part of the computer system and they cannot be used without the computer. Hence, it was held that these peripherals would be eligible for depreciation at a rate that is applicable to computers (i.e., 40%). Accordingly, networking equipment should be treated at par with computers in terms of the depreciation lifecycle. This will align SEZ legislation with the tax legislation.
Recommendation #2
Government should amend Rule 49 of SEZ Rules to change the depreciation period for networking equipment and other IT equipment from 10 years to 5 years.
- Denial of depreciation benefits
As per Rule 49 of the SEZ Rules, an SEZ unit may remove capital goods to DTA on payment of duty. The applicable duty is payable on the depreciated value of capital goods.i Based on feedback from the industry, we would like to highlight that custom officers are insisting that the SEZ units pay duty on the original value of the IT assets and not on the depreciated value, while de-bonding secondhand IT products. The SEZ Act/ Rules nowhere restricts the benefit of depreciation in the case of secondhand IT assets.
Recommendation #3
Government should clarify that SEZ unit will be entitled to depreciation benefit while making payment of duty on de-bonding of capital goods.
- Change from approval process to intimation process in case of zone-to-zone transfer
- Rule 38 of SEZ Rules states that goods/ services admitted into SEZ without payment of duty or manufactured or produced or partly processed or semi-finished goods may be transferred or given on loan to a unit or developer within the same SEZ or in another SEZ or to an Export Oriented Unit/ Software Technology Park/ Bio-Technology Park unit without payment of duty, after obtaining prior written permission of the Specified Officer.
- Based on feedback from the industry, we have highlighted that the process for Zone-to-Zone transfer is extremely cumbersome and requires multiple level of approvals. Further, authorities insist on physical verification during such inter-unit transfer, which adds to the burden of the SEZ units and further delays the process. This ultimately impacts export operations, customer project deliverables and timelines.
Recommendation #4
Given that there is no duty payment involved in case of inter-unit transfer, government should waive off the requirement of physical verification of goods as ascertainment of balance useful life of laptops may not be required at this stage. Units would anyway be making duty payment (where applicable) upon final debonding of assets to DTA/ at the time of exit from SEZ. Further, we have requested the government to simplify the process of approval in case of inter-unit transfer by resorting to an intimation-based process (instead of approval).
- Simplifying the process of service invoice endorsement
- As per S. 26 of SEZ Act, SEZ units/ developers are exempted from payment of any duties or taxes on goods/ services procured from DTA for authorised operations. Rule 30 of SEZ Rules prescribes the requirement to obtain endorsement for goods/ services.
- MoCI introduced the SEZ Online system in 2010 which enables electronic filing and processing of SEZ related transactions that SEZ developers, co-developers and units have with SEZ administration. The system provides following modules for procurement of goods and services:
- DTA Procurement Form: This module provides the procedure for preparation and submission of DTA procurement form through SEZ online system for goods.
- DTA Services Procurement Form (DSPF): This module provides the methodology for procuring services from DTA. Under this module, invoices are required to be endorsed online by the Specified Officer (SO) for claiming zero rate benefit, wherein providing details of Letter of Undertaking (LUT) of the DTA supplier is mandatory.
- Based on feedback from industry, we have highlighted the following issues being faced while applying in DSPF:
- Issues in providing documents for approval of DSPF: With the introduction of DSPF, SEZ units can obtain endorsement for services procured for authorised operations of SEZ. However, the units receive large number of invoices in relation to services procured without payment of GST. Moreover, a number of documents/ details are mandatorily required to be submitted while making an application in DSPF (such as Letter of Undertaking [LUT] number, tax invoice copy, invoice payment details, supplier’s details, mapping of service with authorised list of services issued by SEZ authority, etc.).
- LUT Number - Units have informed that many suppliers do not provide details of LUT number. As a result, SEZ units are required to do rigorous follow ups with the supplier for getting the details.
- Invoice payment details - The SEZ units are required to provide supplier’s invoice payment details in DSPF. It is a time-consuming activity to pull out payment details from bank payment and ERP for each payment. Further, the unit will not be able to apply for DSPF if the payment has not been made to the supplier. This adds to compliance burden of the SEZ unit.
- XML file - It has also been noticed that SEZ portal does not accept the xml upload file if any required information is missing. Further, in case of any technical glitches, the portal does not show the exact error message. This results in confusion for the units.
- Issues in obtaining LUT: SEZ units are mandatorily required to provide LUT from supplier while uploading DSPF for endorsement of invoice. As mentioned above, many suppliers do not provide details of LUT number. As a result, SEZ units are required to do rigorous follow ups with the supplier for getting the details. It is important to note that the primary responsibility of filing LUT under GST is that of the supplier of services making zero rated supplies. Further, the supplier is required to mention the LUT details on the invoice. Hence, where the supplier fails to provide LUT number, SEZ unit cannot be mandated to provide such details for DSPF filing. Further, non-availability of supplier LUT should not stop the units from availing duty benefits.
- Delay in receipt of endorsed tax invoices: This is leading to rejection of GST refund claims. Minimum 2-3 attempts have to be made by DTA supplier along with SEZ customers for endorsements. Even in this era of digitisation, officers insist on physical documents and that too original copy of invoice.
Recommendation #5
- During service tax era, one-time approval was provided to each supplier for services rendered to SEZ units as per Notification 40/2012-Service tax dated June 20, 2012. Similar practice should be followed under GST to avoid invoice-wise approvals through DSPF. [This will require issuance of a notification by Ministry of Finance and implementation of the same on SEZ online portal will be done by MoCI.]
- Government should remove the requirement of providing supplier LUT in DSPF for enabling units to take benefit of zero rating. Alternatively, government should provide a mechanism to link supplier GSTIN with supplier LUT. With this, supplier LUT could be auto populated basis supplier GSTIN details fed in DSPF form.
- There should be an API based integration of SEZ online with GST System. For processing refund of IGST paid on exports, the export invoices are today shared by GST system with Customs System (ICEGATE) using APIs.
- Supply of services in DTA against Indian Rupees to be allowed without any restriction
- Sub-Clause (h) of Clause (A) of Rule 53 of SEZ Rules provides that for computing Net Foreign Exchange (NFE) earnings, export of services shall include service provided to DTA subject to the condition that remittance for such services is received in foreign currency or in certain cases in Indian Rupees which is otherwise considered as received in foreign currency by RBI.
- The term 'Services' is defined in S. 2(Z) of SEZ Act to mean tradable services which:
- are covered under the General Agreement on Trade in Services annexed as IB to the Agreement establishing the World Trade Organisation concluded at Marrakes
- may be prescribed by the Central Government for the purposes of this Act; and
- earn foreign exchange.
- Hence, if SEZ unit receives remittance in foreign exchange for supply of services to DTA unit, the same shall be counted as export of services and if the remittance are received in INR, the same shall be permitted by RBI for the purpose of computing NFE.
- SEZ authorities are interpreting that SEZ unit are not allowed to supply services to DTA unit with remittance in INR. However, no such restriction applies for sale of goods to DTA units. This leads to challenges for SEZ units and impacts the business.
Recommendation #6
A suitable clarification should be issued by the Government to clarify that SEZ unit are eligible to supply services to DTA unit with the remittances in INR.
- Broad basing of Letter of Approvals across states
- An amendment was introduced in Rule 19(2) of SEZ Rules via Notification No. G.S.R 909(E) dated September 19, 2018. This amendment empowered the approval committee to sanction proposals for the merger of Letters of Approval (LoA) of two or more units belonging to the same company or firm. This merger, however, is contingent upon the condition that these units remain within the same SEZ both before and after the merger.
- It is important to note that in the IT sector, frequent movement of employees and assets between units is not just common, but crucial to meeting the demands of export projects. This industry practice involves regular shifting of resources from one business unit to another based on operational needs. However, the licensed operational nature of SEZ units demands substantial time investment in seeking approvals and maintaining separate records for inter-unit resource and asset movements.
- When transferring resources, the originating unit must file an online transfer request, which then requires approval from the receiving unit and confirmation by the approval committee. This process imposes additional compliance, especially for inter-SEZ transfers of assets and employees. Page 7 of 7
Recommendation #7
- Given these complexities, we have requested the government to extend the benefit of Rule 19(2) beyond allowing mergers of LoAs within the same SEZ to encompass all licenses within a state. This can be achieved by amending or extending the rule, subject to prevailing conditions, to permit the merger of licenses within the state. This extension could be particularly beneficial for units with a proven track record of achieving positive NFE.
- Simplifying the approval process for transferring assets and employees between units would significantly expedite these movements.
- To further alleviate administrative burdens, the option for merging SEZ licenses should be made available to units. This flexibility would allow units to decide based on their business requirements, easing the administrative load of multiple compliance tasks such as maintaining and filing returns, reports, and records, as well as seeking approvals. While units would continue to be regulated, compliance could be managed from an overall state-level perspective, offering a more streamlined and efficient regulatory environment.
- Expansion in the list of authorised services
The Department of Commerce has issued a list of 66 services which may be permitted by all Unit Approval Committees (UACs) as default authorised services, wherein units are eligible to avail exemption from taxes on all such listed services. However, the authorised list of services does not include services related to employee welfare such as canteen, medical, insurance, gym, printing & stationery, housekeeping, etc.
It is important to note that IT industry is one of the leading exporters in India and has been serving the nation when it comes to earning foreign exchange. The sector is ever changing, characterised by disruptive technological developments and, in turn, relatively quick changes in skill requirements. As a result, the industry is dependent on its human capital which form the core resource in ideal sense. Thus, employee wellness and welfare are integral part of businesses of IT companies. Non-inclusion of these services in the authorised list of services results in additional cost for businesses.
Recommendation #8
The government should expand the list of authorised services to include expenses incurred by businesses on canteen, medical, insurance, gym, printing & stationery, housekeeping, etc.
