Debonding of SEZ Unit

For commercial reasons, many businesses that are now located in Special Economic Zones (SEZs) wish to relocate and establish themselves in Domestic Tariff Areas (DTAs). Some businesses wish to permanently relocate a specific proportion of their workforce to virtual workplaces (DTAs). Units must de-bond their IT hardware that was deployed to employees tagged to SEZ units in order to leave the SEZ or transfer staff from SEZ to DTA.

There are currently no defined rules for de-bonding duty-paid assets to DTA in the Special Economic Zones Act, 2005 (SEZ Act) read with the Special Economic Zones Rules, 2006 (SEZ Rules). The SEZ Rules just outline the steps that must be taken in order to transfer duty-free assets from SEZ to DTA. When this occurs, the clearance of products utilized by SEZ units for their authorized operations to DTA is regarded by SEZ authorities as the import of "second hand/used goods." Therefore, on such DTA certifications, the rules outlined in Foreign Trade Policy (FTP) Paragraph 2.31 pertaining to the import of used goods are applicable.

A Special Economic Zone (SEZ) unit must go through certain requirements in order to be debonded. Debonding is the process via which a company or unit departs the SEZ program and loses the rights and obligations associated with it.

Obtaining authorization/ license from DGFT for de-bonding

Customs personnel are putting pressure on the DGFT to get authorization before de-bonding assets from SEZ units to DTA (as mentioned in FTP paragraph 2.31). As SEZs are seen as foreign territory, the government are classifying them as imports of secondhand or used commodities into India.

It's important to keep in mind that FTP only forbids the first import of used or secondhand IT assets into India. However, as mentioned in FTP Paragraph 2.31, the ban does not extend to IT assets or products that are already imported and sold in India, including DTA and SEZ entities. Furthermore, as stated in paragraph 2.31 of the FTP, we would like to bring attention to the fact that there are no regulations in the FTP that prohibit the clearance of used IT assets during the debonding process from SEZ to DTA.

It is not the first time that India is importing these kinds of commodities from elsewhere.

Notably, de-bonding IT assets under other export schemes approved by FTP, such as Software Technology Parks of India (STPI), Export Oriented Units (EoUs), or Bio-Technology Parks (BTP), does not require obtaining a license from DGFT or any other organization. Moreover, the Free Trade Zone Regulation of the European Union (EU) and Asia-Pacific (APAC) regions does not stipulate the conditions for the surrender of duties and taxes in the case that goods from SEZ units are untagged.

DGFT Notification on Debonding secondhand IT assets from SEZ to DTA

The Ministry of Commerce and Industries' Directorate General of Foreign Trade (DGFT) has released a notification amending Paragraph 2.31 of Foreign Trade Policy 2023 (FTP) on the transfer of used information technology (IT) assets from Special Economic Zones (SEZ) to Domestic Tariff Areas (DTA).

The clearance of products from SEZ to DTA was being handled by SEZ authorities as an import of "second hand/used goods" before the notification was issued. Therefore, on such DTA clearances, the rules outlined in FTP Paragraph 2.31 regarding the import of used products are applicable. The FTP states in paragraph 2.31 that the import of used IT products is prohibited. Prior to importing these products, the importer must obtain authorization or license from DGFT.

Used IT assets can now be moved from SEZ to DTA without a license, provided that the following requirements are met, according to the DGFT:

Provided that the items are not more than five years old from the date of manufacturing and that there is a minimum usage of two years in the SEZ, such used IT assets may be transported from the SEZ to the DTA for continued use in their DTA operations.
If a unit is leaving a SEZ and moving to a DTA, it is permissible to import used IT assets into the DTA without a license as long as the goods are within five years of the date of manufacture. IT assets, on the other hand, that were used for less than two years and came into the SEZ region in a second-hand, used, or old form are not covered.

Here's a general procedure for debonding an SEZ unit:

Preparation of Application

Prepare a debonding application to be submitted to the Development Commissioner (DC) of the Special Economic Zone (SEZ) including the unit.
Provide a justification for the debonding and include pertinent information about the unit's performance, export responsibilities, and any other compliance-related issues.

Documentation

Submit necessary documents along with the application. Common documents include:

a duplicate of the SEZ unit's Letter of Approval (LOA).
copies of licenses for import and export.
a thorough inventory of the assets, which includes raw materials, equipment, and plants.
Information on any unmet export duties.
evidence of having paid all necessary taxes and levies.
A certificate of no objection (NOC) issued by customs officials.

Examination by Development Commissioner

The application and any supporting documentation will be reviewed by the DC.
If necessary, they could ask for further information or documentation.
The DC verifies that all export duties have been fulfilled and that any outstanding debts or taxes have been paid.

Approval of Debonding

The DC will grant an approval for debonding in principle once all requirements are met.
A Bond-cum-Legal Undertaking (BLUT) or any other assurance that the authorities specify may be needed from the unit.

Customs Clearance

The unit needs to request de-bonding clearance from the Customs officials.
Customs will check the information, examine the items in person if needed, and determine what duties and taxes are due.
A clearance certificate will be issued by Customs after everything is in order.
Customs Clearance: Get a clearance certificate from the customs officials prior to debonding.
Duty Payment: For capital goods, raw materials, and completed goods that were imported or purchased under SEZ privileges but are now being transferred to the Domestic Tariff Area (DTA), pay any applicable customs charges, excise duties, or fines.
Documentation: Keep track of duty payments and send them to the Customs office and the SEZ authorities.

Payment of Duties and Taxes

Pay any outstanding taxes, tariffs, or penalties that might be incurred while importing products eligible for SEZ benefits.
Provide the Customs and SEZ authorities with proof of payment.
Clauses Regarding Tax Holidays: Make sure you comply with the conditions for continuing or ending income tax benefits under SEZ provisions (such as Section 10AA of the Income Tax Act) if your unit was receiving them after debonding.
TDS and Additional Levy: Make sure you pay any outstanding taxes and fulfill all of your TDS (Tax Deducted at Source) responsibilities.

Exit Order from SEZ

The DC will issue an Exit Order formally ending the unit's participation in the SEZ program upon Customs clearance.
The unit will now be subject to the laws and regulations that are relevant to it as a Domestic Tariff Area (DTA) unit.
Report Submission: You might still have to send in reports to the SEZ authorities on a regular basis for a certain amount of time after debonding.
Giving Up Your SEZ License: Make sure the relevant authority receives the SEZ license and all associated approvals.

Post Debonding Compliance

After debonding, the unit has a set amount of time to keep records and submit mandatory reports to the SEZ authorities.
Verify that a DTA unit is in accordance with all applicable local, state, and federal legislation.

Updating Records

Change any pertinent documents, permits, and registrations to reflect the SEZ to DTA status shift.

Notification to Stakeholders

Notify all parties involved about the debonding and status change, including banks, financial institutions, and other business partners.
Notify banks and other financial institutions of the debonding, particularly if there are any changes to the collateral or financial arrangements.
Customers and Suppliers: Notify important clients and suppliers of the debonding to prevent problems with contract fulfillment or the supply chain.

Goods and Services Tax (GST) Compliance

GST Registration: To reflect the status change from a SEZ unit to a DTA unit, update your GST registration information.
GST Payments: Upon debonding, be sure that any input tax credits or GST exemptions you may have received under SEZ laws are reversed or properly accounted for in accordance with GST law.
GST Returns: Keep up with filing GST returns and abide by all GST laws that apply to DTA entities.

Labour Law Compliance

Update Labor Registrations: In order to reflect the unit's new status, all labor laws' registrations and licenses, including the Factories Act and the Shops and Establishments Act, should be updated.
Employee Benefits: Guarantee the uninterrupted continuation of employee benefits and statutory contributions (such as ESI and EPF).
Respect for Local Labor rules: Following debonding, the unit must abide with the labor rules that apply to non-SEZ regions.

State and Local Taxes/Levies

You might have to abide by state-specific taxes and levies that apply to units operating in non-SEZ areas, depending on the state where the unit is located.
Local Authorizations and Permits: Make sure that every local license and permission that a DTA unit needs, including trade licenses, is updated or received.

Environmental Compliance

Verify that all licenses, environmental clearances, and compliance reports are current, if relevant.
Send the required reports, updated to reflect the new operational status, to the environmental authorities in your community.

Corporate Law Compliance

Board Resolutions: If relevant, adopt the requisite board resolutions authorizing the debonding and submit the required paperwork to the Registrar of Companies (RoC).
Annual files: Verify that the status change of the unit is reflected in all annual files, including financial statements and annual returns.
Modification of Business Activities: If the company's business activities change as a result of debonding, amend the Memorandum and Articles of Association as needed.

Post Debonding Audit

After debonding, it is a good idea to carry out an internal audit to make sure that no duties remain unfulfilled and that all legal requirements have been fulfilled.
The unit might still be watched after debonding to make sure that any extended EO is completed.
Record-Keeping: To guarantee compliance with all requirements, keep records for the time period mandated by the SEZ authorities.

How SKMC Global can help you?

A specialized and knowledgeable team at SKMC Global will support and advise your business in every way possible, including consolation and advisory services, help with paperwork and filing, compliance reviews, negotiation and mediation, customs and duty management, post-debonding transition support, and continuous assistance until the de-bonding process is finished.

Our SKMC Global team will make sure that the SEZ debonding process is managed effectively, causing the least amount of disturbance to business activities and guaranteeing complete compliance with all legal and regulatory standards by offering these services.