Friday, June 29, 2007

Noose around SEZs tightened

Purchases from domestic tariff area to be treated as imports

Posted online: Friday, June 29, 2007 at 0044 hours IST

NEW DELHI, JUN 28: The government is planning to treat 'certain' goods
purchased by special economic zones from the domestic tariff area (DTA)
as imports. This is aimed at preventing the misuse of tax incentives by
At present, these are treated as just purchases and not as imports. This
will force SEZ units to substantially increase exports to meet the net
foreign exchange (NFE) criterion specified in the SEZ Act.

The NFE requires SEZ units to export more than what they import over a
five-year period after production starts. Experts see it as a retrograde
step, which could jeopardise the entire operational flexibility
available to SEZs and reduce investment in such zones.

Government officials, however, said SEZ units would require to export a
major chunk of their production instead of selling it in the domestic
market. The finance and the commerce ministries have finally agreed on
treating purchases from DTA as imports. The SEZ Rules would be modified
soon, they said.

A government official said, after SEZ Rules changes were brought in,
"any supply from DTA to an SEZ unit —which results in benefits under the
Foreign Trade Policy—will be treated as imports, and hence liable for
export obligations."

Fresh Curbs
• Imports by SEZs Rs 1 crore
• Domestic buying by SEZs Rs 50 lakh
• Total procurement (import + domestic) Rs 1.5 crore
(As domestic procurement will now be treated as import)
• Value addition by SEZs (say 10%) Rs 15 lakh
• Total product value Rs 1.65 crore

Purchases where export-related benefits —the advance advance licence
scheme, duty entitlement passbook scheme, duty-free import entitlement
certificate and the duty drawback benefits—are availed of will be
treated as imports.

Experts said these changes would defeat the purpose behind setting up
SEZs—that of generating additional economic activity.

"It will affect their operational flexibility and further discourage
both backward and forward integration of SEZs with the domestic market,"
said Lalit B Singhal, director-general of Export Promotion Council for
export oriented units and SEZs. The finance ministry had earlier pointed
out that some SEZ units were selling goods in the domestic market
instead of exporting them— the main purpose of SEZs.

In fact, during a meeting of an empowered group of ministers on SEZs in
January, it was proposed that zones be denied tax benefits unless they
fulfilled their 50-70% export obligation. The fresh move is being seen
as a compromise formula between the finance ministry and commerce

Proposed norms
• If domestic procurement is counted as imports, SEZs will have to
compulsorily export goods worth Rs 1.5 crore to meet the positive net
forex criterion
Current norms
• SEZs are entitled to sell domestically goods worth Rs 51 lakh and
required to export goods worth only Rs 1 crore to meet the positive NFE


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