Exclusive | Finance Ministry not in favour of SEZs selling in domestic market at reduced duties

Representative image: Reuters

Representative image: Reuters

The Commerce Department’s proposal to allow companies in Special Economic Zones (SEZs) to sell their products in India’s vast domestic market has again seen opposition from the Revenue Department, sources say.

Currently, firms and units located in SEZs have access to duty-free imports. But this benefit is allowed only on the condition that their goods will only be exported, and not sold in the domestic market.

Under Section 30 of SEZ Act, 2005, domestic sales of goods manufactured in SEZs is restricted. Supplies made from an SEZ to the domestic market -called the Domestic Tariff Area (DTA) – are treated as imports into India.

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.

Currently, if and when they sell to domestic players, SEZ manufacturers have to pay customs duty as well as integrated goods and services tax.

The issue of allowing SEZ manufacturers to sell exports in DTA on favourable conditions had been raised multiple times by the Commerce Department. However, the latest updated proposal has again elicited a negative response from the Revenue Department under the Finance Ministry. It has shot down the plan, saying the government will lose significant taxes as a result.

Lower duty plan

On the other hand, the Commerce Department had floated the idea that SEZ goods be allowed into DTAs, at least at a reduced import duty. “Considering that goods imported from India’s free trade agreement (FTA) partners are, as it is, brought in at a lower or a completely nil rate, we suggested that when goods from SEZs are sold in DTAs, that low or nil rate be approved,” a senior Commerce Department official said.

However, the Revenue Department has reiterated its stand that permitting SEZs to sell in DTAs at zero duty (the rate at which most products are imported from India’s FTA partners) will cause significant revenue losses to the government, he added.

The department also believes that it will provide an unfair duty advantage to SEZ units as compared to domestic manufacturers outside such enclaves.

Promotion of MSME investments in SEZs by linking with MSME schemes and allowing alternate sectors to invest in sector-specific SEZs is among the recommendations by the Baba Kalyani Committee on SEZs. It had also batted for additional enablers and procedural relaxations as well as granting SEZs infrastructure status to improve their access to finance and enable long-term borrowings.

The Commerce Department has also pointed out that many SEZs are operating at sub-par levels, with the number of current units being much lower than the original target.

Industry push

Industry groups, such as the Export Promotion Council for Export-Oriented Units and Special Economic Zones (EPCES), had written to the Commerce Department, arguing this rule be changed. “They had pointed out that the global trade slowdown since 2019 and the Coronavirus-led economic slump had put the future of SEZ units at risk,” a person in the know said.

Last year, the government had informed Parliament that between 2008 and March 2021, there had been 101 instances when SEZs were de-notified. The reasons given for these requests for de-notification include poor market response, lack of demand for space and change in the fiscal incentive regime for SEZs.

The Trade Promotion Council of India (TPCI) also favours bringing exporters in an SEZ and foreign exporters are at par, when it comes to selling goods in DTAs.

“Therefore, an exporter within SEZs should be incentivised on the degree of value-addition he brings to a product. He should be allowed to import raw material at zero duty and avail duty rebate, proportionate to value addition. This will keep him at an advantageous position as opposed to importing finished products from another country,” TPCI founder Chairman Mohit Singla said in a statement.