The finance ministry is learnt to have rejected the latest commerce ministry proposal to allow special economic zone (SEZ) units to sell goods in the domestic market at the lowest import duties the country offers to its free-trade agreement (FTA) partners.
Already hard-pressed to maintain fiscal discipline, the finance ministry is also unlikely to exempt SEZ units and developers from paying the minimum alternate tax (MAT) and the dividend distribution tax (DDT)–as sought unequivocally recently by both the commerce ministry and SEZ developers–in the upcoming Budget, said a senior government official.
The department of revenue feels that permitting the SEZs to sell goods in the domestic tariff area (DTA) at zero duty (the rate at which most products are imported from India’s FTA partners) will provide an unfair duty advantage to SEZ units vis-à-vis domestic manufacturers outside such duty-free enclaves, apart from causing revenue losses to the ex-chequer, another senior official told FE.
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.
One of the officials, however, said the argument of revenue losses doesn’t hold much weight, as the country also loses tax revenue when it imports from its FTA partners. On the claim of injury to domestic manufacturers outside the SEZs if the latter are allowed to sell in the DTA at concessional or zero duty, the commerce department argues that they are in any case at a disadvantageous position vis-à-vis manufacturers of India’s FTA partners. So why not give the same FTA benefits to SEZs and create more domestic employment and also save foreign exchanges? he asked. Importantly, the department of industrial policy and promotion (DIPP) had also supported the commerce department’s proposal.
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 due to such exemptions.
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.
The commerce ministry had proposed these moves as it held that while the tax exemption will improve export competitiveness, permission to sell goods in the DTA would boost manufacturing by helping SEZ units utilise idle capacities.