The most commercially significant SEZ benefit is the customs duty exemption on imports — which allows SEZ manufacturers to import raw materials, capital goods, and intermediates without paying the Basic Customs Duty and the IGST that would otherwise be payable. This creates a significant cost advantage over DTA manufacturers who are buying the same inputs with duty paid. The customs duty exemption requires the goods to be used within the zone for authorised operations — goods diverted to the Domestic Tariff Area (DTA) without proper bonding and duty payment are subject to customs duty demand and penalty.
The income tax deduction under Section 10AA provides a 100% deduction for the first five years of production, 50% for the next five years, and 50% of the profit ploughed back into the business for the following five years. Importantly, Section 10AA benefits are available only to units that commence production before the sunset date specified by the government — and the sunset has been repeatedly extended but remains a compliance planning consideration. GP advises SEZ units on the interaction between Section 10AA, Minimum Alternate Tax (MAT), and the Alternative Minimum Tax (AMT) applicable to partnership firms and LLPs in SEZs.
Advisory on the SEZ unit setup process — preparing the application to the Unit Approval Committee (UAC) for the Letter of Approval (LOA), the documentation required for the UAC presentation, and the conditions typically imposed by the Development Commissioner on the LOA. GP advises on the projected NFEP (Net Foreign Exchange Positive) calculation, the investment commitments, the employment projections, and the product/service scope of the authorised operations — all of which determine the conditions of the LOA and the compliance obligations of the SEZ unit for its full operating period.
Advisory on the SEZ customs compliance framework — the bond executed with the customs authority for goods imported into the zone, the procedure for import of goods under the customs duty exemption (Bill of Entry for Home Consumption with SEZ endorsement), the warehousing of capital goods within the zone, and the procedure for bringing goods into the zone from the DTA (which is treated as an export from the DTA to the SEZ and entitles the DTA supplier to the zero-rating of IGST and the export benefits available under the Foreign Trade Policy).
Advisory for suppliers to SEZ units on the zero-rating of IGST on their supplies — which allows the supplier to supply goods or services to the SEZ unit without charging IGST (or, if IGST is charged, to claim a refund). The zero-rating requires the supply to be accompanied by a Letter of Undertaking (LUT) or a bond, and the invoice must reflect the SEZ endorsement. GP advises suppliers on the documentation required for zero-rated supplies and assists with the refund process where IGST has been charged and needs to be recovered.
Advisory on the procedure for selling goods produced in the SEZ to the Domestic Tariff Area — which is treated as an import into India from the SEZ (a notional import) and requires payment of the applicable customs duty and IGST on the transaction value of the goods sold to the DTA. GP advises SEZ units on the DTA sale procedure, the duty calculation methodology, the documentation required, and the interaction between DTA sales and the NFEP calculation (DTA sales are counted as exports for NFEP purposes only to the extent of the foreign exchange component of the goods or services supplied).
Advisory on the Section 10AA income tax deduction for SEZ units — the profit computation methodology, the ring-fencing of SEZ profits from non-SEZ income, the treatment of expenses allocable between SEZ and DTA operations, and the interaction with MAT and AMT. GP prepares the Section 10AA working for SEZ unit income tax returns and defends the deduction in tax assessments where the assessing officer has disallowed part of the SEZ profit deduction on grounds of incorrect profit allocation or non-qualification of the income as export income.
Advisory on the Net Foreign Exchange Positive (NFEP) calculation and monitoring — the most critical compliance obligation for SEZ units. NFEP is calculated as the difference between the foreign exchange earned (exports) and the foreign exchange spent (imports) over the operating period. A negative NFEP at the end of the operating period triggers a duty demand on all goods imported into the zone during the period — a potentially enormous liability. GP advises on NFEP monitoring, the steps to ensure NFEP is maintained positive, and the defence of NFEP shortfall cases before the Development Commissioner.
The introduction of GST in 2017 significantly changed the SEZ framework — replacing the pre-GST indirect tax exemptions with a system of IGST zero-rating and refunds. The transition has created ongoing complexity in the treatment of supplies to SEZ units: the zero-rating is conditional on proper documentation (endorsement of the Bill of Entry, LUT/bond by the supplier); the refund process is managed by the GST authorities rather than the Development Commissioner; and the interaction between IGST zero-rating and the customs duty exemption on SEZ imports creates overlapping compliance obligations. GP advises on the complete GST and customs interface for SEZ operations.
An SEZ developer (the entity that develops and operates the SEZ zone) has a different tax framework from an SEZ unit. The developer's exemptions are specific to the infrastructure construction and operation of the zone — not to the manufacturing or service activities of the units within the zone. GP advises SEZ developers on the income tax and GST treatment of their development activities, the customs duty implications of their infrastructure imports, and the interface between their obligations as a developer and the compliance requirements they pass through to the units within the zone.
Supplies from the Domestic Tariff Area to SEZ units and developers are treated as deemed exports under the Foreign Trade Policy — entitling the DTA supplier to a range of export benefits including duty drawback, RODTEP, and refund of advance authorisation benefits. GP advises DTA suppliers on the deemed export benefit claims available for their SEZ supplies and on the documentation required — ensuring the supplier captures the full economic benefit of the zero-rating on their SEZ supplies.
GP's SEZ practice covers the unit from the LOA application through the full operating period — LOA conditions negotiation, customs compliance framework, IGST zero-rating and refunds, Section 10AA optimisation, NFEP monitoring, DTA sale procedures, and exit from the zone. Having a single team that knows the unit's LOA conditions, its NFEP position, and its tax profile makes the advisory more coherent and the compliance management more effective.
SEZ matters are simultaneously customs matters (the import duty exemption, the DTA sale duty payment) and income tax matters (Section 10AA, MAT) and GST matters (IGST zero-rating, refunds). GP's integrated taxation practice covers all three simultaneously — ensuring the advice on one dimension is consistent with and optimised for the others.
An SEZ unit that discovers a potential NFEP shortfall has a limited window to correct it before the calculation period closes. GP advises on the corrective measures available — accelerating export invoicing, reviewing the import categorisation, and identifying NFEP-improving transactions — and, where a shortfall is unavoidable, prepares the best possible case for the Development Commissioner's consideration of the duty demand.
Defended a Bangalore IT services SEZ unit whose Section 10AA deduction of Rs.12 crore was partially disallowed by the assessing officer — who reallocated a portion of the unit's profits to the non-SEZ operations of the company on the ground that the method used to allocate shared service costs between the SEZ unit and the DTA operations was incorrect. GP filed an appeal before the Income Tax Appellate Tribunal, producing the unit's LOA, the ring-fenced profit computation, and an expert opinion on the allocation methodology. ITAT upheld the allocation methodology and restored the full Section 10AA deduction.
Acted for a Chennai manufacturing SEZ unit that had accumulated a NFEP shortfall of USD 2.4 million at the end of its third year of operations — primarily because a major export contract had been cancelled and replaced with DTA sales. The Development Commissioner issued a duty demand on the imports into the zone. GP presented a detailed case to the DC demonstrating that the NFEP shortfall was temporary — the cancelled export contract was being replaced by new export orders (supported by letters of intent from overseas buyers) — and proposed a remediation plan under which the unit would achieve NFEP positive within 18 months. The DC accepted the remediation plan and suspended the duty demand pending the NFEP improvement.
Acted for a Mumbai DTA supplier to an SEZ electronics manufacturing unit in recovering a Rs.4.2 crore IGST refund that the GST authority had rejected on the ground that the invoices did not bear the required SEZ endorsement. GP filed the appeal before the Appellate Authority for Advance Ruling, demonstrating that: the endorsement requirement was procedural; the SEZ unit had provided the supplier with the Bill of Entry confirming the goods' entry into the SEZ zone; and the goods had undisputedly been received by the SEZ unit for use in authorised operations. The Appellate Authority directed the GST authority to process the refund.
GP's SEZ practice covers the complete lifecycle — LOA application, customs compliance, IGST zero-rating, Section 10AA optimisation, NFEP monitoring, and Development Commissioner proceedings — for both SEZ units and the DTA suppliers who supply them.
The SEZ practice is integrated with the customs and GST practices — ensuring that the customs duty exemption on imports, the IGST zero-rating on inward supplies, and the Section 10AA income tax deduction are all optimised simultaneously and consistently.
The customs duty exemption, IGST zero-rating, Section 10AA, and the NFEP calculation — with a compliance checklist for every year of the SEZ operating period.
Read Insight →How NFEP is calculated, the consequences of a shortfall, and the remediation options available before the Development Commissioner exercises the duty recovery power.
Read Insight →Whether you need advisory before a transaction or are already in dispute with customs or the SEZ authorities — speak to GP today.