The commerce ministry may float a proposal to allow units in special economic zones (SEZs) to sell goods in the domestic market, at least temporarily, at the lowest tariffs at which India imports from its free-trade partners. This will help the SEZs cope with the havoc wrought by the Covid-19 pandemic, sources said.
Currently, SEZ units are mandated to pay the regular customs duty on a product if they sell it in the domestic tariff area (DTA). This is because an SEZ is a specifically delineated duty-free enclave and is a deemed foreign territory for the purpose of trade operations, duties and tariffs. Such units, therefore, have access to duty-free imports of goods, which manufacturers in the DTA are not entitled to.
“The proposal is already before the commerce ministry. The pandemic has hit SEZs hard and hurt their liquidity flow. So, there is a need to implement this proposal, at least temporarily, to help them. This can be done after the revenue department’s approval,” a source told FE.
As such, SEZs in India have somewhat lost their appeal, especially after the government last year adopted a sunset clause for granting a phased income-tax holiday for 15 years, according to senior industry executives. So, only those SEZ units which started production on or before June 30, 2020, will now get a 100% I-T exemption on export income for first five years, 50% for the next five years and 50% of the ploughed-back export profit for five years thereafter.
Moreover, the corporation tax has been trimmed to as low as 15% for setting up new manufacturing units anywhere. So, without fresh incentives, SEZs won’t be able to draw many companies now, they say.
Interestingly, a similar proposal made by the commerce department in 2015-16 was rejected by the finance ministry. Revenue department officials had then argued that permitting SEZs to sell goods in the DTA at zero duty (the rate at which many products are imported from India’s FTA partners) would provide an unfair tax advantage to SEZ units vis-à-vis domestic manufacturers outside such duty-free enclaves. Also, any such move could potentially cause revenue losses to the exchequer, they reckoned.
However, commerce ministry officials have been arguing that the country also loses customs revenue when it imports from its FTA partners.
On the claim of injury to domestic manufacturers outside the SEZs, the officials have been highlighting that they are, in any case, at a disadvantageous position vis-à-vis manufacturers in India’s FTA partners. So, it’s better to give the same FTA benefits to SEZs and create more domestic employment, according to the officials. Such a move would help SEZ units utilise idle capacities and save foreign exchanges for the country by lowering imports to that extent.
Data collated by the Export Promotion Council for EoUs and SEZs show outbound shipments of manufactured products and trading services from SEZs crashed by 21% from a year before to Rs 2.46 lakh crore in FY21, while the country’s overall merchandise exports dropped by only 3% to Rs 21.54 lakh crore. Of course, services units, the dominant segment in SEZs, seemed to have coped with the pandemic impact better. Still, overall exports from SEZs recorded a 4% decline in FY21, against a 1.5% drop in the country’s total exports (in rupee terms).