Exiting SEZ And STPI Units: Downsizing Without Compliance Pitfalls

Special Economic Zones (SEZs) and Software Technology Parks of India (STPI) units have long been attractive structures for IT and export-oriented businesses in India. They offer tax incentives, duty-free imports, and regulatory relaxations. But these advantages come with a corresponding web of obligations, ranging from export performance to asset tracking and repatriation of benefits.

When businesses downsize or shut down operations in SEZs or STPIs, they often underestimate the complexity of compliance. A misstep, like writing off assets without Development Commissioner approval or failing to repatriate duty benefits, can trigger penalties, interest, and even bar future approvals. Downsizing, therefore, is a carefully choreographed legal process.

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Understanding the Legal Framework Governing SEZ and STPI Exits

The legal framework of SEZ and STPI units during downsizing or closure is not identical, though they share common principles. Both frameworks are designed around the premise that incentives are conditional and are granted only so long as the unit meets its export obligations. They follow the prescribed processes for entry and exit.

SEZ Units

The SEZ regime is governed primarily by the Special Economic Zones Act, 2005 and the SEZ Rules, 2006. Exit from an SEZ requires approval from the Development Commissioner and, in certain cases, the Board of Approval (BoA). The law mandates:

• Clearance of customs duties and taxes foregone on imported or domestically procured capital goods, unless valid exemptions apply.
• Compliance with the "positive Net Foreign Exchange (NFE)" requirement up to the date of exit.
• Submission of audit certificates and reconciliation of benefits availed.

Only after satisfying these conditions can the unit be officially de-notified or permitted to exit.

STPI Units

STPI units operate under the Foreign Trade Policy (FTP), along with the STPI Scheme notified under the Ministry of Electronics and Information Technology (MeitY). Here, the exit procedure revolves around:

• Obtaining a "No Dues" certificate from STPI authorities.
• Settling customs and excise liabilities on capital goods imported duty-free.
• Ensuring export performance obligations are met or compensatory duties are paid.

Unlike SEZs, STPI units are not tied to geographical notification of land, but their approvals are tied to the specific Letter of Permission (LoP), which needs to be formally surrendered and cancelled.

Exits and Downsizing

Exiting or downsizing a SEZ or STPI unit is a procedural exercise layered with statutory checks. The process is not uniform; it depends on whether the business seeks a complete exit (closure of the unit) or a partial downsizing (surrender of part of the premises, reduction in operations, or de-bonding of specific assets).

SEZ Exit Approvals

• Application to Development Commissioner (DC): The unit must file an application for exit, supported by board resolutions, asset lists, and compliance reports.

• BoA Approval (where applicable): In sensitive cases, like premature exit before completion of lock-in periods or transfer of assets to another SEZ unit, Board of Approval clearance is mandatory.

• Customs/Excise Clearance: All duty-free imports and domestic procurements must be accounted for. If the unit wishes to retain assets in the Domestic Tariff Area (DTA), applicable customs duties (with interest) need to be paid.

• GST Considerations: Supply of capital goods into DTA post-exit is treated as a taxable supply under GST, requiring appropriate invoicing and tax payment.

STPI Exit Approvals

• Surrender of Letter of Permission (LoP): The unit must formally submit its LoP to STPI with a closure request.
  

• No Dues Certificate: Issued by STPI after confirming there are no pending export obligations or unpaid duties.

• Customs Bond Cancellation: As STPI units execute a legal undertaking (bond) at the time of set-up, cancellation of the bond requires a clean customs clearance of all imported capital goods.

• De-bonding Procedure: Units may choose to de-bond specific assets or premises instead of a full exit. De-bonding attracts duty payment and requires prior customs permission.
  

Practical Challenges in Exit

• Delays in Asset Valuation: Customs often requires valuation before de-bonding assets, slowing down timelines.

• Reconciling Benefits: Many units struggle with reconciling past duty benefits with current liabilities during exit.
  

• Overlapping Authorities: SEZ units face a dual regulatory regime—customs authorities, the Development Commissioner, and sometimes GST officers—all requiring separate filings and clearances.
  

• Employee Continuity: Downsizing also has a labour law angle—employers must comply with retrenchment compensation under the Industrial Disputes Act, 1947, where applicable.

Asset Disposal and Write-Offs

One of the most sensitive aspects of downsizing SEZ/STPI units is handling capital goods and assets that were imported or procured duty-free. The law views these assets as tied to the export obligations of the unit; any attempt to dispose of them without approval can invite heavy penalties.

De-bonding of Assets

When a unit wishes to retain imported or domestically procured assets in the Domestic Tariff Area (DTA), it must:

• File a de-bonding request with customs.
• Pay applicable customs duty and integrated GST (if not already paid at the time of procurement).
• Ensure proper documentation so that the asset is removed from the bonded inventory register.
  

Write-Off of Assets

In practice, companies often hold obsolete IT hardware, damaged equipment, or software licences with no residual value. The SEZ Rules (Rule 29) and STPI guidelines permit write-off of capital goods, but only with prior approval. Authorities typically require:

• Chartered Engineer's certificate confirming that the asset is beyond use or has negligible scrap value.
• Development Commissioner's or STPI Director's approval for write-off.
• Disposal of scrap under customs supervision, with payment of duty if any recoverable value is realised.

Transfer of Assets Between Units

Sometimes, instead of writing off or de-bonding, companies transfer usable assets to another SEZ or STPI unit. Such transfers are allowed but require:

• Prior intimation and approval from both jurisdictions (the transferring and receiving unit authorities).
• Payment of any applicable duty differences if the transfer is into DTA or a non-eligible entity.

GST Implications

• Disposal of assets into the DTA is considered a supply and attracts GST.
• Write-offs where no consideration is received may not trigger GST liability, but proper disclosures in GST returns are crucial to avoid disputes.

Compliance Red Flags

• Writing off assets without approval is one of the most common compliance lapses flagged in exit audits.
• Units must maintain a clear audit trail—original invoices, import documents, and approvals—to withstand scrutiny years after closure.

Conclusion

Downsizing or exiting an SEZ or STPI unit must be managed with precision. The regulatory philosophy behind both frameworks is clear: incentives were granted to promote exports, and when a unit downsizes, those incentives must either be honoured through export performance or repaid through duties and taxes.

Downsizing done right is not an end, but a disciplined pause—a way to regroup without burning bridges with regulators. For Indian businesses, the law does not penalize exit; it penalizes careless exit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.