Developers will soon be allowed to transfer used plant and machinery of up to 20 per cent of their total capital goods requirement to special economic zones they set up.

This will mark a significant relaxation of the rules that currently prohibit developers from using second-hand capital goods in SEZs. The rules will be amended shortly and will allow many SEZ developers to leverage existing units outside the zones for equipment, saving them a significant amount of time and cost.

"We will be sending the proposed change in the rules to the law ministry for its clearance," a commerce ministry official confirmed. The proposal was originally introduced in the Income Tax Act in the 2007-08 Budget.

The objective of the current rules prohibiting the use of old equipment in SEZs was to encourage fresh investment and ensure that units did not misuse the tax breaks allowed in SEZs by simply relocating units.

To this end, the commerce department had amended the SEZ Rules in August 2006, prohibiting the use of plant and machinery in SEZs that was previously used in domestic tariff areas.

SEZ industry executives have welcomed the move, saying it will bring benefits across the board, particularly to the infotech and IT-enabled service and high-end engineering businesses.

"Many companies want to bring in costly and custom-made equipment, including high-capacity servers and local area networks, to new units in SEZs. There is a genuine need in certain sectors to transfer some old equipment to the SEZ units," said Abhishek Goenka, partner, BMR and Associates.

The relaxation would not lead to misuse since the permissible percentage of second-hand capital goods was not large, he added.