Added one comment just above the sub-head Processing vs non-processing. Please include in final copy

The Centre has amended the Special Economic Zone (SEZ) Rules to allow demarcation of a portion of the built-up area in an IT/ITES SEZ as a non-processing area, subject to conditions including repayment of tax concessions attributable to the area.

“A non-processing area may be used for setting up and operation of businesses engaged in IT/ITES, and at such terms and conditions as may be specified by the Board of Approval,” stated a notification issued on December 6 by the Commerce and Industry Ministry.

Under the Special Economic Zones (Fifth Amendment) Rules, 2023, the repayment of tax benefits is to be calculated as the benefits provided for the processing area of the SEZ, in proportion of the built-up non-processing area to the total built-up processing area of the IT/ITES SEZ, as specified by the Centre, it stated.

Tax benefits from the creation of social or commercial infrastructure and other facilities, if proposed to be used by both SEZ units and those in the non-processing area, must be repaid based on a certificate issued by a chartered engineer, it added.

The amendment has been long demanded by the industry since the phasing out of tax benefits had resulted in occupiers not wanting to be located in SEZ because of the compliances required leading to vacancies, according to Gaurav Karnik, Tax Partner and National Leader – Real Estate, EY. “Though some of the fine print around tax benefits having to be returned needs to be ironed out, this move should help reduce vacancy and also have a positive impact on current REITs which have large SEZ space in their portfolios,” he noted.

Processing vs non-processing area

The processing area in an SEZ is where units are located for manufacture of goods or rendering of services. Non-processing area is where supporting infrastructure is created.

 “Demarcation of a non-processing area shall not be allowed if it results in decreasing the processing area to less than fifty per cent of the total area or less than the area specified,” according to the notification.

The minimum built-up processing area in Category A, Category B and Category C cities have to be 50,000 sq m, 25,000 sq ms and 15,000 sq m, respectively.

“Non-processing area shall consist of complete floor and part of a floor shall not be demarcated as a non-processing area,” the notification further specified.

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