‘Equalisation’ levy: SEZs likely to get tax relief for domestic tariff area sales

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September 30, 2021 4:15 AM

SEZs sold manufactured goods worth Rs 50,033 crore in the domestic market last fiscal, down from Rs 53,831 crore in FY20. Their domestic sales would soar substantially if the tax incidence drops, industry executives reckon.

Moreover, the corporation tax has been trimmed to as low as 15% for setting up new manufacturing units anywhere. So, without fresh incentives, SEZs won’t be able to draw many companies now, they say.Moreover, the corporation tax has been trimmed to as low as 15% for setting up new manufacturing units anywhere. So, without fresh incentives, SEZs won’t be able to draw many companies now, they say.

The commerce ministry is exploring a proposal to impose an “equalisation” levy on firms in the special economic zones (SEZs) when they sell goods in the domestic market, a senior official told FE.

The levy will likely be lower than the regular customs duties (BCD and CVD) that SEZ units are currently mandated to pay while supplying to the domestic tariff area (DTA). However, it is expected to neutralise the advantages that SEZs, being specifically delineated duty-free enclaves, enjoy vis-à-vis domestic manufacturers, said a source. “The commerce ministry will take a final call on the issue soon,” he added.

Of course, this impost will be different from the equalisation levy — or the so-called Google tax — that is imposed on e-commerce entities.

The plan, which requires the concurrence of the finance ministry, is aimed at helping Covid-hit SEZs better utilise their idle capacities and improve sales.

SEZs sold manufactured goods worth Rs 50,033 crore in the domestic market last fiscal, down from Rs 53,831 crore in FY20. Their domestic sales would soar substantially if the tax incidence drops, industry executives reckon.

Earlier, the commerce ministry had suggested that SEZ units be allowed to sell goods in the domestic market at the lowest tariffs (zero duty in most cases) at which India imports from its free-trade partners. “The revenue department was not keen on such a proposal on the ground that it puts domestic manufacturers at a disadvantage. So, the equalisation levy is being mooted,” said the source. It will ensure that both domestic manufacturers and the SEZs units are on a “level-playing field when it comes to selling goods in the local market,” he added.

According to the extant norms, an SEZ is a deemed foreign territory for the purpose of trade operations, duties and tariffs. Such units, therefore, have access to duty-free imports of goods, which manufacturers in the DTA are typically not entitled to.

Calls for extending succour to the SEZs gained momentum after the pandemic hit their operations as well as cash flow hard.

As such, SEZs in India have somewhat lost their appeal, especially after the government last year adopted a sunset clause for granting a phased income-tax holiday for 15 years, according to senior industry executives. So, only those SEZ units which started production on or before June 30, 2020, will now get a 100% income-tax exemption on export income for first five years, 50% for the next five years and 50% of the ploughed-back export profit for five years thereafter.

Moreover, the corporation tax has been trimmed to as low as 15% for setting up new manufacturing units anywhere. So, without fresh incentives, SEZs won’t be able to draw many companies now, they say.

Data collated by the Export Promotion Council for EoUs and SEZs show, in rupee term, outbound shipments of manufactured products and trading services from SEZs crashed by 21% from a year before to Rs 2.46 lakh crore in FY21, while the country’s overall merchandise exports dropped by only 3% to Rs 21.54 lakh crore. Of course, services units, the dominant segment in SEZs, seemed to have coped with the pandemic impact better. Still, overall exports from SEZs recorded a 4% decline in FY21, against a 1.5% drop in the country’s total exports (in rupee term).

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