Tax Holiday in Free Trade Zones

Complete Tax Holiday for industrial units situated in Free Trade Zones

Free Trade Zone, also called Foreign-trade Zone, formerly Free Port, an area within which goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties.

There are six free trade zones namely Kandla free trade zone, Santa Cruz Electronics Export processing zone, Falta Export processing Zone, Madras export processing zone, Cochin Export Processing zone and Noida Export Processing zone.

Kandla Free Trade Zone

Kandla, established in 1965, boasts to be India's first free trade zone. Free trade zone in Kandla provides environment ensuring internationally competitive duty free environment,with low costs for export production. The basic infrastructure facilities for the units like developed land, Standard design factory buildings, power, water and customs clearance facilities are provided here. Government of Gujarat and Indian Government offer special incentives to units set up in this zone and that are 100 per cent export oriented.

Santa Cruz Electronics Export Processing Zone

Santa Cruz Electronic Export Processing Zone, was established in year 1974 at Mumbai with access to commercial, industrial and social infrastructure. It has got efficient communication network, a competent ancillary base. It has skilled and experienced urban work force and a well developed financial and credit structure.

Falta Export Processing Zone

Falta Export processing Zone was approval by Govt. of India in 1984 and started work in 1984-85. It declared a Customs Bonded Area on 16th of August. 1985. Its first export was on 4th of January, 1986.

Madras Export Processing Zone

MEPZ Special Economic Zone was established in 1984 with the objective of promoting foreign direct investment, enhancing foreign exchange earnings, and creating greater employment opportunities.

The Zone was converted into a Special Economic Zone on 1.1.2003. The added objective of the SEZ is to facilitate exports through reduction of transaction costs. To this effect, the Ministry of Commerce and Industries has introduced special features that include Offshore Banking Units and Container Freight Stations to be set up within the Zone, besides liberalised Customs procedures. It is expected that the cost, time and effort saved would translate to higher exports from the Zone.

MEPZ SEZ is a multi-product Zone housing 86 functional units. Another 5 units are under various stages of implementation. The export turnover for the year 2002-2003 was Rs.820 crores. Garments, software and engineering products contributed more than 50% of export value. Recent growth has been in engineering sector with special reference to automobile ancillaries.

Located in Chennai (formerly Madras), the Zone is under the administrative control of the Ministry of Commerce and Industries and caters to the needs of both units in the Special Economic Zone as well as of 100% EOUs located in Tamil Nadu, Pondicherry and Andaman & Nicobar islands.

Cochin Export Processing Zone

Cochin Special Economic Zone is situated on southwest India in the state of Kerala, set up for export oriented production. It is a deemed foreign territory within India for purposes of trade and customs duties, with special rules for facilitating foreign direct investment.It is run directly by the Government of India.

Noida Export Processing Zone

Ministry of Commerce has set up this Noida Export Processing Zone in 1985 for 100% EOUs and the only one located off-the-shore. It has got one of the most developed infrastructure facilities for the Units.

It is located in NOIDA on the outskirts of New Delhi, in the Gautam Buddha Nagar, dist of U.P. It is just 30 km away from International Airport of Delhi, just 18 km from ICD (Inland Container Depot). NOIDA has strong industrial base with more than 3000 industries.It is located in 310 Acres of land.

Conditions for Availing Facility

Sections 10A provides complete tax exemption in respect of profits and gains derived from industrial undertakings set up in these zones for a period of five initial assessment years.

1. It applies to any industrial undertaking which fulfils the folowing conditions-
   • It has begun to manufacture or produce articles in any electronic hardware or soft technology park during the previous year relevant to the assessment year commencing on or after 1st day of April, 1994 or in any free trade zone on or after 1st day of April,1981
   • It is not formed by splitting up or the reconstruction of a business already in existence
   • It is not formed by the transfer to a new business machinery or plant previously used for any purpose
2. The profits and gains of the undertaking shall not be included in the total income of the assessee in respect of any five consecutive assessment years opted for by the assessee, falling within a period of eight years begining with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things
3. After the expiry of the tax holiday period ther will be no carry forward of any unabsorbed losses, unabsorbed depreciation, unabsorbed investment allowances, unabsorbed capital expenditure on scientific research, the unabsorbed capital expenditure on family planning, tax holiday deficiency or any other deuction or allowance admissible under the income tax act.
4. The industrial units set up during any previous year relevant to the assessment years 1977-78 to 1980-91 will at their option , be entitled to complete tax holiday for the xpired period of five years.
5. Where the goods transferred to any other business or whre goods held for any other purpose are transferred to the business of thenew industrial undertakings to which the new section applies, then the consideration for the transfer of goods for the purposes of computation of deduction under the section shall be the amrket value of such goods as on the date of transfer of goods.
6. The benift od deduction under section 10A is optional
7. It may be noted taht the tax concession under section 10A will be availble to all tax payers, incl;uding foreign companies and non-resident non-corporate tax payers.

Exchange Controls

The Reserve Bank of India (RBI) administers India's extensive foreign exchange controls and regulations. All foreign exchange transactions are subject to the control and approval of the RBI, including the transfer of profits and dividends. Controls on outflows of foreign funds are stringent due to India's foreign exchange shortage. The Indian government provides no guarantees against inconvertibility. Companies with 40 percent or more foreign equity are subject to certain provisions of the Foreign Exchange Regulations Act.

Regulations governing the remittance of dividends state that the foreign currency outflow due to dividends may not exceed export earnings and that automatic approval is granted on preference and equity shares up to certain limits. There are no limitations applied to interest payments on foreign loans although there are limits applied to the repatriation of capital. There is a cap on royalties paid under technology licensing agreements equal to eight percent of export sales or five percent of domestic sales.

Businesses can consult the Exchange Control Manual of the Reserve Bank of India for all rules and regulations governing India's foreign exchange controls regime.