SEZs face customs duty on power sales outside zone

The finance ministry plans to slap a customs duty of 16%, or a flat 50 paise per unit, on power sold by plants in special economic zones (SEZs) to customers outside the zones.

Such a duty would crimp the profit margins of groups like Reliance, Adani and Essar that run SEZs. Finance ministry believes RIL subsidiary Reliance Jamnagar Infrastructure Ltd sells power to consumers in domestic tariff area and saves about Rs 15 crore a quarter in costs compared to power producers outside SEZs who do not get most tax breaks SEZ units get.

SEZ units are exempt from all taxes?including customs, excise, service and income taxes?since they bring foreign exchange.

The ministry is ascertaining whether Adani group?s Mundra SEZ and Essar?s Hazira SEZ also sell power to customers outside the SEZs and gain from it. The ministry suspects they do, said a person privy to the development on condition of anonymity.

The finance ministry?s decision to impose a duty on SEZs? power sale comes despite stiff opposition from the commerce ministry. Udyog Bhawan?s arguement is that the government should not discourage power units from selling their surplus power since the country has a power shortage and is behind target on power output.

The finance ministry, the official said, is not against power sales outside the zones, only that it should get a share of the gains.

?Because of the cost advantage in SEZs, power producers there make a huge profit. They should be willing to share a part of it with the government?, said the official.

The finance ministry also believes if these units are allowed to sell to customers in the domestic tariff area without a tax, it would discourage investments in DTA in the power sector. While power projects within SEZs are allowed duty-free imports irrespective of their capacity, only mega power projects get this benefit outside SEZs, said PwC executive director R Muralidharan.

In the 2008 Budget, the government took Parliament?s approval for a specific import duty of Rs 2 per unit of power, but soon issued an order not enforcing the duty. The exercise was done so that the government can better time the introduction of the duty on power import. Now the ministry is thinking of a partial rollback of this exemption order.