The commerce ministry has made a renewed push to allow firms in the special economic zones (SEZs) to sell goods in the domestic market at a low duty, as it prepares a raft of proposals to replace the existing law governing these duty-free enclaves with a new piece of legislation, official and industry sources told FE.
The ministry wants the levy to be lower than the regular customs duties that SEZ units are currently mandated to pay while supplying to the domestic tariff area (DTA). At the same time, this levy would be enough to neutralise the advantages that SEZs enjoy vis-à-vis domestic manufacturers. The idea is to enable Covid-hit SEZs to better utilise their idle capacities and improve sales.
“Both the commerce and the revenue departments are in talks on this issue. A decision will be taken soon,” said the source. Another source said, “Talks are also going on as to what could be the form of support to SEZs if this (lower duty) doesn’t materialise.”
The commerce ministry is targeting to introduce a new SEZ Bill in the monsoon session of Parliament, which is usually convened in July, said one of the sources. A swift decision on the critical issue of assistance to woo new investors is, therefore, the need of the hour.
Once considered to be drivers of future export growth, SEZs have been losing sheen after the government adopted in 2020 a sunset clause for granting a phased income-tax holiday for 15 years. This is in sync with the finance ministry’s stated bid to cut the myraid of exemptions to make the country’s tax system simpler and more robust. Only those SEZ units which started production on or before June 30, 2020, now get a 100% I-T exemption on their export income for the first five years, 50% for the next five years and 50% of the ploughed-back export profit for five years thereafter.
The commerce ministry believes that without some kind of support, it would be difficult to draw investors to set up units in these zones, especially when the corporation tax has been reduced to as low as 15% to establish new manufacturing units anywhere.
Earlier, the commerce ministry had suggested that SEZ units be allowed to sell goods in the domestic market by paying the lowest tariffs at which India imports from its free-trade partners (zero duty in most cases). However, the revenue department was not keen on it on the ground that it would provide an unfair tax advantage to SEZ units vis-à-vis domestic manufacturers outside such duty-free enclaves.
However, now that most of the privileges that were being enjoyed by the SEZ units have ceased to exist, DTA manufacturers will have a level-playing field once a low duty to offset the remaining incentives still extended to firms in the SEZs is imposed. In that case, the SEZ units can be allowed to sell in the domestic market to better utilise their capacity.
“The issue is that the situation on the ground has changed substantially over the past few years. So, policies for SEZs need to change as well to suit new realities,” said one of the sources.
The commerce department intends to make these zones engines of export growth again, conscious of their immense potential to help the country realise the lofty merchandise export target of $1 trillion by FY28, against $422 billion in FY22.
SEZs sold manufactured goods worth Rs 50,033 crore in the domestic market in FY21, down from Rs 53,831 crore in FY20. Their domestic sales would soar substantially if the tax incidence drops, industry executives reckon.
However, exports of manufactured products from the SEZs surged 60% until December last fiscal, compared with a 51% jump in the country’s overall merchandise exports during this period.