The commerce ministry has renewed its demand that developers of special economic zones (SEZs), as well as the
units in these enclaves, be given exemption from minimum alternate tax (MAT) and dividend distribution tax (DDT).
In a pre-Budget paper submitted to the finance ministry, the ministry also said that if removal of MAT is not possible at this stage, at least the rate could be cut to the original level of 7.5%.
According to the commerce ministry, SEZ units should be permitted to sell goods in the domestic market at the lowest import duty that the country offers to its free trade partners.
“The department of industrial policy and promotion (DIPP) has also supported the commerce department’s proposals,” an official said.
The government imposed 18.5% MAT on SEZ developers and units and DDT on developers in 2011-12 when Pranab Mukherjee was the finance minister, after the revenue department had complained of massive revenue losses to the exchequer due to such exemptions.
The latest recommendations followed several rounds of meetings held by the commerce ministry with developers and officials from Export Promotion Council for Export-oriented Units & SEZs (EPCES), who have been complaining that the imposition of MAT and DDT has eroded the investor-friendly image of SEZs and created uncertainty in the minds of investors.
Before the MAT and DDT were imposed in 2011-12, growth in exports from SEZs was as high as 121% (2009-10) and 43% (2010-11), far exceeding the increase in the country’s overall goods exports for these years. Such high growth rates dropped consistently since the taxes were imposed and finally exports contracted by 6.6% in 2013-14, compared with the 4.7% rise in overall merchandise exports for that fiscal.
While the tax exemption will improve export competitiveness, permission to sell goods in the domestic tariff area (DTA) will boost manufacturing by helping SEZ units utilise idle capacities at a time when demand in the global market remains weak and the government is making all-out efforts to promote the ‘Make in India’ initiative, the official said.
The move to allow sale of goods at the DTA at the lowest possible tariff will also result in foreign exchange savings for the country, apart from creating domestic employment, he said. This will partly address the concerns expressed by the Comptroller and auditor general (CAG) last year that most SEZ units belong to the IT/ITeS sector, and not the manufacturing sector. The CAG had said almost 57% of the country’s SEZs catered to the IT/ITeS sector and only 9.6% to the multi-product manufacturing sector.
According to the current norms, SEZ units have to pay the regular customs duty on a particular product if they sell it in the domestic market. 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. Accordingly, goods and services from the DTA to SEZ are to be treated as exports and goods coming from SEZ into DTA are considered imports.
However, according to a finance ministry official, endorsing both moves suggested by the commerce ministry will not just cause huge revenue losses to the government, but also harm domestic manufacturers, especially if the SEZs are allowed to sell goods in the DTA at zero duty (the rate at which most products are imported from India’s FTA partners). This is because SEZ units will have “an unfair” advantage against domestic manufacturers, as the latter are subjected to higher taxation levels, he added.
But the commerce ministry official said the argument of revenue losses in such cases doesn’t cut much ice, as the country also loses indirect tax revenue when it imports from FTA partners.