The Commerce Ministry could launch a proposal allowing Special Economic Zone (SEZ) units to sell goods domestically, at least temporarily, at the lowest tariffs India imports from its free trade partners. This will help SEZs cope with the devastation caused by the Covid-19 pandemic, sources said.
Currently, SEZ units are mandated to pay regular customs duties on a product if they sell it in the Domestic Tariff Zone (DTA). This is because a SEZ is a specifically demarcated duty-free enclave and is considered foreign territory for the purposes of trade operations, duties and tariffs. These units therefore have access to duty-free imports of goods, to which DTA manufacturers are not entitled.
“The proposal is already before the Ministry of Commerce. The pandemic has hit SEZs hard and harmed their cash flow. It is therefore necessary to implement this proposal, at least temporarily, to help them. This can be done after approval from the revenue department, ”a source told FE.
As such, SEZs in India have lost some of their appeal, especially after the government passed a sunset clause last year for granting a phased income tax exemption for 15 years, according to senior industry executives. Thus, only SEZ units which started production on or before June 30, 2020 will now benefit from an IT exemption of 100% on export income for the first five years, of 50% for the next five years and of 50% of export profits reinvested. for five years thereafter.
In addition, corporate tax has been reduced to 15% for the creation of new manufacturing units anywhere. So without new incentives, SEZs will not be able to attract many businesses now, they say.
Interestingly, a similar proposal made by the Commerce Department in 2015-16 was rejected by the Department of Finance. Finance Ministry officials then argued that allowing SEZs to sell goods in the DTA at zero tariff (the rate at which many products are imported from India’s FTA partners) would offer an unfair tax advantage to units in SEZs over domestic manufacturers outside of these duty-free enclaves. In addition, such a move could potentially result in lost revenue for the Treasury, they estimated.
However, Commerce Ministry officials have argued that the country also loses customs revenue when it imports from its FTA partners.
Regarding the allegation of harm to domestic manufacturers outside the SEZs, officials pointed out that they are, in any case, at a disadvantage vis-à-vis the manufacturers of India’s FTA partners. So it is better to give the same FTA benefits to SEZs and create more domestic jobs, officials say. Such a decision would help SEZ units to utilize spare capacity and save foreign exchange for the country by reducing imports to that extent.
Data compiled by the Export Promotion Council for EoUs and SEZs shows that outgoing shipments of manufactures and commercial services from SEZs slumped 21 percent from the previous year to 2.46 crore. lakh Rs in FY21, while the country’s overall merchandise exports fell only 3% to Rs 21.54 lakh crore. Of course, service units, the dominant segment in SEZs, seemed to have coped better with the impact of the pandemic. Nevertheless, the overall exports of the SEZs registered a decline of 4% in FY21, compared to a drop of 1.5% in the country’s total exports (in rupees).