Government allows non-SEZ IT/ITES units to operate out of IT/ITES SEZs

The Ministry of Commerce and Industry by a notification dated December 6, 2023 (“SEZ Notification”) has amended the Special Economic Zones Rules, 2006 to introduce a new Rule 11B paving the way for use of portions of the built-up area in an Information Technology or Information Technology Enabled Services Special Economic Zones (“IT/ITES SEZs”) by non-SEZ businesses engaged only in Information Technology or Information Technology Enabled Services (“IT/ITES”). This amendment enables non-SEZ IT/ITES businesses to operate from a demarcated non-processing area of an IT/ITES SEZ, without de-notification of special economic zone (“SEZ”) under the SEZ laws.

Key aspects for consideration:

The application for demarcation must be filed by developer of the IT/ITES SEZ with the Board of Approval.
The demarcated non-processing area can only be used for setting up and operations of businesses engaged in IT / ITES on such terms and conditions as may be specified by the Board of Approval.
The demarcated non-processing area should comprise of an entire floor and not part of a floor of the built-up area.
Appropriate access control mechanisms are required to be in place for the SEZ space and the demarcated non-processing area for adequate screening of movement of persons as well of goods.
Permission for demarcation is conditional upon repayment (without interest) by the developer of the IT/ITES SEZ of the tax benefits attributable to such demarcated non-processing area and tax benefits already availed for creation of social or commercial infrastructure and other facilities, if proposed to be used by both the IT/ITES SEZ and the IT/ITES businesses engaged in the non-processing area.
Post demarcation of the non-processing area for IT/ITES businesses, the processing area cannot be reduced to less than 50% of the total area or the minimum built-up processing area prescribed for cities as per the categorisation under the SEZ Rules, 2006. In large cities, the size of the built-up processing area of the SEZ post demarcation cannot fall below 50,000 square meters.
IT/ITES businesses located in such demarcated non-processing areas are not eligible for any rights or facilities extended to the SEZ units. They are to be treated at par with a business operating in a domestic tariff area.
No tax or duty benefit is available on the operation and maintenance of common infrastructure and facilities of the entire SEZ (and not merely in the proportion that the non-processing area bears to the aggregate of the processing and non-processing areas).