Certain legal provisions extended to the Special Economic Zones are exclusive and unique. For instance, Section 53 of the Special Economic Zones Act, 2005 deems it to be a territory outside that of India. It is treated as a foreign tariff zone as opposed to a domestic tariff zone, which comprise of all the areas other than the SEZs. Special Economic Zones (SEZs) are specially demarcated territories, primarily for taxation implications. However, their special treatments are restricted to trade operations and subsequent taxation implications only.
Laws Applicable to SEZs are the following:
- Special Economic Zones Act, 2005
- Special Economic Zones Rules, 2006
- Foreign Trade (Development and Regulation) Act, 1992
- Foreign Exchange management Act, 1999
Special Economic Zones Act, 2005
The Special Economic Zones Act, 2005, provides the legal framework for establishment of Special Economic Zones and also for units operating in such zones.
The SEZ Act at a glance
The SEZ Act has 58 sections inclusive of Eight chapters and Three Schedules. In simple terms The SEZ Act, 2005 has three defining features. The SEZ Act deals with primarily the following aspects:
i) The process of setting up of SEZs.
ii) The functioning of the SEZs.
iii) The benefits accrued by the developer for setting up an SEZ.
An individual; the Central Government; the State Governments and a company, including a foreign company, may individually or jointly set up a Special Economic Zone for the following purposes:
a) Manufacturing Goods;
b) Rendering Services;
c) A Free Trade and Warehousing Zone.
Special Provisions of the SEZ Rules
Perhaps the most important provision laid down is contained in Rule 5 sub-rule (4) wherein it has been specifically mentioned that a developer or co-developer must retain at least twenty six per cent of the equity in the entity proposing to create business within the Special Economic Zone. As such in the event of acquisition of the developer, the maximum permissible limit is acquiring seventy three percent of the shares, not more, as the developer must retain the rest.
A brilliant feature of associating oneself with Special Economic Zones, may be to enjoy the exemptions, drawbacks and concessions on the goods and services allowed, but not as a Developer or Co-Developer, but as a Contractor. In addition to the concessions available to the Developer or Co-Developer, a Contractor also avails of the same.
All the documents in such cases should bear the name of the Developer or Co-developer along with the contractor. Documents should be filed jointly in the name of the Developer or Co-developer and the Contractor.
Exceptional Treatments of Special Economic Zone
The First Schedule
The First Schedule to The Special Economic Zones Act, 2005 contains the list of enactments under which several exemptions are given for the SEZs.
The Exact Legal Position
An important judicial verdict elucidating the exact legal position of the Special Economic Zones was delivered by the Gujarat High Court last year. Justice K.A. Puj in Essar Steel Ltd v. Union of India 24STT121) held, “………reliance on Section 53 of the SEZ Act 2005 to contend that a Special Economic Zone is a territory outside India, is misconceived. Section 53 provides that the Zone would be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations. The term customs territory cannot be equated to the territory of India and in fact, such term has been defined in the General Agreement of Tariffs & Trade, to which India is a signatory, to mean an area subject to common tariff and regulations of commerce and that there could be more than one customs territory in a country. Moreover such an interpretation would lead to a situation where a Special Economic Zone would not be subject to any laws whatsoever. The entire SEZ Act 2005 would be rendered redundant since it is stated to extend the whole of India. In any case, various provisions of the SEZ Act would be endered redundant and unworkable if the Special Economic Zone was to be considered an area outside India. This is apart from the fact that such a declaration would be constitutionally impermissible…..”
As such a Special Economic Zone is only subjected to special customs provisions. Mergers & Acquisitions, much like legal provisions, other than customs, follow the normal due process of law as in other territories of the country.
Rajiv Gandhi National University of Law,
“[Submitted as an entry for the MightyLaws.in Blog Post Writing Competition, 2011]”