The much-awaited changes to the Special Econmic Zones Act, meant to improve the viability of these tax-free enclaves, will be taken to the Cabinet soon, a senior official said. The draft to be considered by the council of ministers, however, would not include proposals entailing huge revenue loss to the government, such as treating domestic tariff area (DTA) sales by SEZ units akin to imports from countries with which New Delhi has free trade pacts.
“While the import duties (applicable on DTA sales by SEZs) will stay, we have suggested that these be imposed on a “duty-foregone basis,” the official said. If taxes are imposed on duty foregone basis, then it will bring down the burden on SEZ units, because then they will just pay the tax that they had saved on imported inputs, and not the applicable tax on the entire finished product, the source explained.
A similar dispensation is currently available in Manufacturing and Other Operations in Customs Bonded Warehouse (MOOWR) scheme. MOOWR is run by the ministry of finance while the SEZ Act is administered by the ministry of commerce and industry.
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Apart from tax issues, the amendments would also seek to address the operational hurdles being faced by SEZs. “Currently, for something as routine as job work for a unit in DTA, the SEZs requure to take permissions. Similarly if IT firms have to get a job done they face numerous compliances issues,” the official said.
Other amendments in the SEZ Act that are being discussed include proposals to make de-notification norms for SEZs easier and streamline approval process for units.
The draft of the Cabinet note on amendments in the SEZ Act has been circulated among different ministries to seek their views on ways to make them more efficient by bringing in economies of scale.
SEZs even now can sell their products in DTA but these sales are treated as imports and subjected to basic customs duty, Integrated Goods and Services Tax (IGST), antidumping, countervailing and safeguard duties (under the Customs Tariff Act, 1975), wherever applicable.
Even sales by DTA units to SEZs do not go through smoothly and have to undergo the same procedures as exports. “Due to these restrictions in SEZs, we are not able to achieves bigger economic scale. So the connect of the SEZs to DTA units has to be improved,” the official who did not wish to be named said.
The flexibility for sale of goods manufactured in SEZs to DTAs has been a decade- old demand of the units in those zones. The SEZ units want to reduce the tax they have to pay for domestic sales and have sought parity with the exporters from countries with which India has Free Trade Agreements (FTAs). This means sales on very low to nil duties.
This demand is unlikely to be accepted as it would put a huge loss of revenue to the general exchequer. In 2022-23 the government collected Rs 41,962 crore tax on domestic area sales by SEZs. In 2023-24 this number is expected to have crossed Rs 45,000 crore.
Currently, 374 SEZs are notified, out of which 276 SEZs are operational. Already 34% of the output of SEZs get sold in the domestic market after payment of import duties and other taxes. In FY 24 exports from SEZs were $ 157.3 billion up 1% on year. Goods exports from the zones grew 2% on year to $ 63 billion while services exports were flat at $ 94.3 billion.
De-notification is basically an approval granted to developers to opt out of the SEZ scheme after being part of it. When SEZs are denotified the developers have to refund all duties and tax benefits. They also require ‘No-objection” from state governments.
Reasons some developers move out of SEZ scheme is because of poor market response, lack of demand for SEZ space or when it does not make business sense. More than 100 cases of do–notification have been approved by the government since 2008.
The streamlining of the approval process could attract more applications for SEZs as the government tries out various schemes to boost manufacturing and exports.
From: financialexpress
Financial News
