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July 25, 2022
2022-5704

Indian Government amends Special Economic Zone rules to permit employees of certain Special Economic Zone units to work from home

  • The new rule allows employees of Special Economic Zone (SEZ) units engaged in Information Technology (IT) or IT enabled services (ITeS) and a few other specified categories to work from home upon meeting certain conditions.

  • The new rule provides guidance on the procedures for seeking the necessary approvals and other compliance requirements.

  • IT/ITeS SEZ units will need to carefully review the impact of this Rule and take steps to obtain approvals and maintain prescribed documentation.

Executive summary

On 14 July 2022, the Indian Government issued a new rule (Rule)1 authorizing SEZ units engaged in the IT or ITeS sectors and a few other specified categories to permit employees to work from home (WFH) upon meeting certain conditions. The new Rule also provides guidance on procedures for seeking approvals and other related compliance requirements.

This Alert summarizes the Rule and its implications for Indian entities operating out of such SEZ units.

Detailed discussion

Background

Indian entities with SEZ units are governed by certain operational regulations under SEZ law. These regulations govern, among other matters, the location from which employees can work out of and restrictions on removal of assets outside of the SEZ unit, given that SEZ units are delineated and notified zones.

In the current business environment, permitting employees to WFH has emerged as an essential requirement for companies to attract and retain talent. The SEZ law had introduced regulations to permit WFH for employees of IT/ITeS SEZ units, but there was lack of clarity on certain operational aspects (e.g., duration of approval, threshold of number of employees permitted to WFH, etc.).

The Indian Government has now issued the Rule clarifying some of these issues.

Clarifications provided in the Rule

Categories of employees

The Rule clarifies that the following employees (including contractual employees) may be permitted to WFH or from any place outside the SEZ unit: (i) employees of IT and ITeS SEZ units; (ii) temporarily incapacitated employees; (iii) employees who are travelling; and (iv) employees who are working offsite.

Process for obtaining approval

The SEZ unit needs to submit its application to the Development Commissioner (DC) of the SEZ containing the terms and conditions of WFH, the date from which permission is sought and details of employees. The application must be submitted at least 15 days in advance (except for employees temporarily incapacitated or travelling) and if employees of the SEZ unit are already WFH, then the application must be submitted within 90 days of the date of issuance of the Rule (i.e., 14 July 2022).

The SEZ unit needs to maintain robust documentation like employee attendance records and the employees working from home may only engage in services that are approved for the SEZ unit.

Number of employees permitted to WFH

The permission granted by the DC will cover a maximum of 50% of the total employees including contractual employees, but the DC is empowered to approve a higher number for valid reasons to be recorded in writing.

Duration of approval

The approval shall be granted for one year, which can be extended annually upon meeting the conditions prescribed under the Rule.

Assets permitted to be taken out of the SEZ

The SEZ unit can provide employees with assets like laptops, computers, video projection systems, other electronic equipment and secured connectivity to facilitate the WFH arrangement, subject to obtaining approvals and maintaining documentation. These assets can be provided without payment of any taxes or duties only for the duration of the WFH approval.

Implications

The Rule is a welcome step and addresses the long-standing request from the IT/ITeS sector for clarity on WFH arrangements from SEZ units. IT/ITeS SEZ units will need to carefully review the impact of this Rule and take steps to obtain approvals and maintain prescribed documentation. In certain specific cases e.g., for SEZ units engaged in voice-based BPO services, WFH regulations under other regulations like Other Service Provider rules will also apply and need to be considered.

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India)

Ernst & Young LLP (United States), Indian Tax Desk

Ernst & Young Solutions LLP, Indian Tax Desk, Singapore

Ernst & Young LLP (United Kingdom), Indian Tax Desk, London

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

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Endnotes

  1. Notification No.G.S.R. 576(E) dated 14 July 2022 introducing a new Rule 43A under the SEZ Rules, 2006
 
 

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