Post COVID-19, there are many corporate entities which are allowing employees to work on Complete Work From Home (WFH) basis or on hybrid basis, i.e., Employees are required to come to office on selected days. This approach has reduced occupancy of physical premises by corporate offices and caused vacation of various rented premises.

Similarly, Information Technology (IT)/ Information technology enabled services (ITES) Special Economic Zones (SEZ) are facing optimum utilization of SEZ premises as many IT/ITES companies have adopted the policy of WFH.  So far, only SEZ businesses are allowed to set-up and operate in a SEZ area. Therefore, post COVID-19, there are many areas and floors which are are lying vacant in SEZ across India.  The government received various representations from Industry and SEZ developers to permit setting up of Non-SEZ IT/ITES units in unutilised SEZ area to ensure utilization of infrastructure and premises. 

Understanding the concerns of SEZ developers, the Ministry of Commerce and Industry has come up with a major amendment in Special Economic Zones (SEZ) rules, 2006 by inserting a new Rule 11B to SEZ Rules through Notification No. G.S.R. 881(E) dated 06th December 2023 allowing non-SEZ IT/ITES business units to set-up in the SEZ area.

As per Rule 11B of SEZ rules, the SEZ developers are to take care of following provisions and conditions for setting up non-SEZ units in SEZ units:

1. Demarcation of Non-processing Area

• As per Rule 11B(1) of SEZ Rules, SEZ developers of an IT/ITES SEZ may demarcate a portion of the built-up area of SEZ as a non-processing area. Such demarcation can be done subject to obtaining approvals from Board of Approvals.
• Permission to demarcate Non-processing Area is permitted only for IT/ITES SEZ and not any other SEZ.
• Such demarcated NPA can be used for setting up and operation of any non SEZ IT/ITES business entity subject to such terms and conditions as may be specified by the Board of Approval at the time of granting approvals.

2. Conditions of demarcation and setting of non-SEZ unit in SEZ area

Demarcation of Non-performing area and setting up and operations of Non-SEZ business units shall be allowed subject to following conditions:

• The SEZ developer shall mark the entire floor as a Non-processing area. Part of a floor can’t be demarcated as a non-processing area. 
• Movement of goods from SEZ units to DTA or vise versa is subject to regulatory compliances. Therefore, There shall be appropriate access control mechanisms for SEZ units and IT/ITES business operating in Non performing areas to ensure adequate screening of movement of persons as well as goods in and out of their premises.  
• Since, part of the area of SEZ has been utilized by the SEZ developers for non-SEZ units therefore, SEZ developers are required to reverse tax benefit availed with respect to such demarcated area.
• Therefore, Board of Approval shall permit demarcation of a non-processing only after repayment of following amounts, without interest, by the SEZ developers:
  • Tax benefits attributable to the such Non-processing area is required to be repaid. Amount to be repaid shall be calculated as the benefits provided for the processing area of the SEZ, in proportion of the built up area of the non-processing area to the total built up area of the SEZ.

Tax benefit to be reverse (without interest) : Benefit provided for processing of SEZ* Built up area of NPA/ Total built up area of SEZ

• Tax benefits already availed for creation of social or commercial infrastructure and other facilities is also required to be reversed if such infrastructure and other facility are proposed to be used by both the SEZ units and Non-SEZ units operating in NPA.

• The amount to be repaid by the SEZ Developer shall be based on a certificate issued by a Chartered Engineer. 

• SEZ developers is required to fulfill following minimum area condition while demarcating:

1. Demarcation of a non-processing area shall not be allowed if it results in decreasing the processing area to less than 50% of total area; or

2. Demarcation of a non-processing area shall not be allowed if built up processing area is less following:

Categories of cities as per Annexure IV-A	Minimum built-up processing Area
Category A	50,000 square meter
Category B	25,000 square meter
Category C	15,000 square meter

3. Benefits and incentives to SEZ units and Non-SEZ Units

• The businesses engaged in IT/ITES SEZ in non processing there shall not be entitled to any rights or facilities available to Special Economic Zone Units. 
• Units established in non-performing areas shall be considered as entities located in Domestic Tariff Area (DTA) and any supply of goods or services from or to such units shall be liable to tax similar to units located in other DTA.
• No tax benefits shall be available on operation and maintenance of common infrastructure and facilities of such SEZ.
• The businesses operating in non performing area shall be subject to provisions of all Central Acts and rules and orders made thereunder, as are applicable to any other entity operating in domestic tariff area.

4. Comments

This is a welcome move of the government and this will help in optimum utilization of SEZ premises which are lying vacant all over India. Further, SEZ are more developed and have better facilities for SEZ units. Now such facilities are accessible to Non-SEZ units as well. However, there are many issues which still require clarification such as extent of board power, manner of computation of tax benefits to be reversed, how to compute builtup area, tax benefit is not allowed for which common infrastructure and facility etc. The Ministry will be required to issue clarification from time to time.