The Central Board of Excise and Customs (CBEC) has recommended an overhaul of the Special Economic Zone (SEZ) Act 2005 saying it has detected gross violations of duty and tax concessions causing it to suffer a revenue loss of Rs 1,75,000 crore to date.
Broadly, the CBEC report has sought the removal of numerous exemptions, drawbacks and concessions that have turned SEZs into tax-avoidance conduits for importers and exporters without any genuine business to back them.
Official sources said this report forms part of the board’s recommendation to the ministry of finance for amendments in Budget 2010-11.
The CBEC’s revenue loss estimate Rs 1,75,000 crore has been derived from concessions extended for capital goods and raw material procured by functioning SEZs developers and those that have been approved and are being set up (SEZs in the process of starting operations have to provide import estimates).
The CBEC had estimated an overall revenue loss of Rs 3,50,000 crore involved in the creation of all SEZs since 2006, when the Act was passed.
The board has submitted its recommendation based on investigation of its field formation towards the end of 2009.
A committee set up under CBEC revealed that the SEZ scheme is subsidising builders for developing residential townships near big cities. SEZ rules specify that at least 25 per cent of the area should be used to develop processing areas for imports and exports. This means 75 per cent of the area in an SEZ comes under the “non-processing” category and is freely available for developers. As a result, several multi-product SEZs have come up with proposals to develop complete townships adjoining the major cities with residential and recreational areas with facilities like entertainment complexes, multiplexes, golf courses, educational institutions, hospitals and so on.
Since these townships are being developed within the SEZ, the cost of capital goods, equipment and raw materials is duty-free.
In view of this, CBEC has recommended that the SEZ Act should make it mandatory to earmark at least 75 per cent of the area in an SEZ for import and export processing.
To avail of exemptions, the CBEC has also recommended that the developer and co-developer of the SEZ should execute a bond-cum-legal undertaking that includes a bank guarantee of at least 5 per cent of the value of imports. This is because the CBEC has found it difficult to recover duties foregone if a unit imports goods under the scheme and the project does not take off within the SEZ.
The report has also suggested redefining the term "exports" by deleting the provision that allows exports to include supplying goods from one unit to another in the same or different SEZ. Investigations have found that the provision enables exporters to claim concession by transferring goods to another SEZ without physically exporting anything.
Also, both the finance ministry and the commerce ministry -- the nodal administrative ministry for SEZs -- should reach a consensus before an SEZ is notified, the report says. Further, provisions of the Customs Act and Central Excise Act should be made applicable to SEZs for recovery of interest, fines or penalties if a unit fails to utilise exempted goods for authorised operations or is unable to account for the goods it imports. Currently, these provisions are exempt under SEZ Act.
Among the other key recommendations are provisions for the valuation of goods under the Custom Valuation Rules 1988, surprise checks by custom officials to examine goods and the introduction of documents for SEZs that procure goods domestically (many tend to show these purchases as imports to benefit from duty concessions).
The report has also said, the direct delivery facility without custom assessment at present prevalent only for movement of all goods within SEZs, should be restricted to emergency cargo and units with impeccable track records.
From the security perspective, CBEC has suggested that cargo, vehicles, documents and people passing in and out of SEZs should be made open to custom surveillance, both physically and through close circuit television as an anti-smuggling measure.
Thursday, January 28, 2010
SEZ Act needs overhaul: CBEC
Abuse of duty-free imports may lead to tighter regulation of SEZs
New Delhi: The practice of a few gems and jewellery units in special economic zones (SEZs) importing European designer jewellery duty-free for wealthy Indian consumers is likely to bring tighter regulation for all SEZ units. About five gems and jewellery units in SEZs are now fighting legal cases against the Centre for allegedly abusing their licences to import raw materials duty-free in order to supply imported designer jewellery to local customers.
The finance ministry and the commerce ministry have decided to introduce a detailed record keeping for SEZ units on what they import duty-free, into which product they go as inputs, and where they finally go as exports. Currently there is no such requirement for SEZ units, since as the government had earlier wanted to free these units because they bring in valuable foreign exchange.
But cases registered against gems and jewellery units in the NOIDA SEZ in the national capital region and SEEPZ SEZ in Maharashtra have brought to light rampant abuse of duty-free import of raw material, forcing the government to bring a closer watch over all SEZ units, said a government official privy to the development.
“Gems and jewellery units argue that it makes economic sense for them to import old fashioned jewellery which could be melted and redesigned for further exports,” said another official who was part of the investigations.
Cases are now underway in the Bombay High Court against five gems and jewellery units in these SEZs for diverting such imported jewellery to local customers outside SEZs. In some cases, designer jewellery was imported as raw material for export production, but what they eventually exported were items like ball bearings. Additional solicitor general Darius Kkambatta is representing the Centre in these cases.
The Centre is now preparing tighter record keeping norms, which would be introduced by amending the SEZ rules. The Centre is also concerned over security, with respect to diversion of such high value items out of SEZs—they could be the means for illegal fund transfer across the border. This was the reason why the commerce ministry had, last November, brought more safeguards against the abuse of the operational flexibility given to SEZ units. The ministry had then allowed investigating agencies such as CBI, police and revenue authorities to enter SEZ premises, conduct search and register cases against offenders without the permission from the SEZ’s development commissioner.
The Centre is debating whether the consignments within SEZs should be randomly examined so that the authorities could ascertain whether the value declared is correct or not. The government fears that illegal cross-border fund transfer can happen by manipulating the declared value of export and import consignments. Now, revenue department officials can check a consignment only on the basis of specific adverse intelligence and after getting consent from the development commissioner of the SEZ
Wednesday, January 6, 2010
Ministry proposes changes in SEZ rules
New Delhi: The commerce ministry has proposed measures to make it easier for developers to exit special economic zones (SEZs) that have been struggling with a contraction in global demand for goods produced at the tax-free enclaves.
Specific provisions for the denotification of SEZs have been been put up for public comments till Thursday, after which they would be formally notified.
The ministry proposes to appoint zonal development commissioners (DCs) whom developers would approach for approval or denotification of SEZs. They would in turn send their recommendations to the Board of Approval, which developers have until now been approaching directly.
Seven out of an existing 20 development commissioners would be given the additional responsibility of zonal DCs.
“This will substantially reduce the burden on the Board of Approval and save valuable productive time though the ultimate decision-making power remains with the Board of Approval,” said Hitendra Mehta, head of law firm Vaish Associates, based in Gurgaon near New Delhi.
The draft notification also proposes to insert provisions for denotification of SEZs, which had until now been at the discretion of the Board of Approval. Now developers who may wish to close down their tax-free zones will have to approach the zonal DC, who will send the proposal to the commerce ministry with recommendations.
SEZs, which are required to be net foreign currency earners to qualify for fiscal incentives, have been hurt by the global downturn and contraction in demand for domestic goods and services. As a result, many developers have approached the Board of Approval to denotify their tax-free enclaves. Till date, the Board of Approval has accepted the denotification requests of 10 SEZ developers.
Present SEZ rules specify that an SEZ has to be operational within three years without defining an operational SEZ. Now the ministry has proposed to make an insertion in the SEZ rules saying that if at least one SEZ unit is operational within the zone, then the SEZ need not apply for an extension of the formal approval.
The draft notification also proposes to include a provision that the minimum built-up area within such a zone has to be constructed within 10 years from the date of notification of the zone, with at least 50% of the area to be constructed in five years. This applies to select product zones such as information technology, pharmaceuticals and biotechnology, which require a minimum area of 10ha of land.
The ministry has also proposed to promote agro-based SEZs by reducing the minimum area requirement from 100ha to 40ha.
“The proposed amendments are intended to clear doubts of SEZ developers,” said L.B. Singhal, director general of export promotion council for export-oriented units and special economic zones.
Friday, March 20, 2009
Department Commerce backs tax exemption for SEZ services
NEW DELHI: The finance ministry should exempt companies in special economic zones (SEZ) from paying tax on the services they consume instead of making them seek refunds, according to the commerce department. Earlier this month, the finance ministry had notified that instead of being exempt, companies within SEZs would have to claim refunds for the tax they pay on services.
“We have written to the revenue department asking it to allow SEZs exemption on service tax within the zone as was being done earlier. For services outside the zone, developers and units could be given reimbursements on the taxes paid,” said a commerce department official.
The industry prefers exemptions over reimbursements as the latter takes time, besides locking up funds with the government for a considerable period. A 10% tax is imposed by the government on 100 services.
Initially, the government exempted companies from tax on services consumed within SEZs. SEZs then demanded that exemption should be extended to authorised services consumed outside the zones such as port-handling, in-land transportation, courier and banking.
Following months of discussions between the commerce and revenue departments, a notification was issued allowing refunds on services availed both outside and inside the zones. But the exemption was short-lived. It was laid down that SEZ developers and units will have to claim reimbursements.
“We have pointed out to the revenue department that this change is unfair especially at a time when the industry is already starved of funds,” the official said. The revenue department has, however, not yet responded to the commerce department’s request.
Wednesday, March 4, 2009
Indian Govt. Allows SEZ Units, Developers To Claim Refund Of Service Tax
The Indian Government has allowed special economic zones or SEZ units and developers to claim refund of service tax, irrespective of whether they are consumed inside or outside the zone. However, the benefit would flow in the form of refund of service tax and not through an exemption.
Until now, the government exempted developers from paying a tax on services that were consumed within the zone, while the services consumed outside the SEZ attracted taxes.
The move to refund tax paid on services provided outside the zone comes following a decision in this regard by the empowered group of ministers on SEZs headed by Finance and External Affairs Minister Pranab Mukherjee.
The Government put in place a new mechanism whereby SEZ developers and SEZ units would have to initially pay the tax on the services rendered to them (from inside and outside the zone) and then get a refund from the tax authorities within 6 months from the date of payment of service tax.
The notification clears the ambiguity with regard to eligibility of the service tax exemption in case of input services consumed by SEZ units and developers that were being disputed by the tax officials. The notification will come into effect on or after the date of publication of this notification in the Official Gazette.
Service tax is levied at the rate of 10%. Some of the services used by the units and developers outside the zone include courier service, transport service among others.
While the industry has welcomed the move to refund tax on services consumed outsides the zone, it wants the Government to give a blanket exemption. On the other hand, tax and trade experts opine that though the scope of the relief has been expanded, the procedure has been changed to provide for only refund of service tax rather than an exemption,
Welcoming the Finance Ministry move, L.B. Singhal, Director-General of Export Promotion Council for Export Oriented Units and SEZs, said "SEZ Act provides ab-initio exemption from service tax, whereas the notification has provided exemption from service tax by way of refund of service tax. Hence, service tax has to be paid first and then refund has to be claimed. It would result into unnecessary blockage of funds, paper work and transaction cost. Hence it would be appropriate if ab-initio exemption could be provided".
Click the following to see the Notification:
Notification No. 9/2009-ST dated 3.3.2009
Govt exempts taxable services provided to Special Economic Zones
Wednesday, February 25, 2009
EOUs, SEZs seek clarification on ending discriminatory taxes
New Delhi, Feb. 24 The Export Promotion Council for EOUs and SEZs (EPCES) on Tuesday hailed the Government decision to end discriminatory tax treatment in respect of those exporters with a unit outside the SEZ as well as a unit in the SEZ, vis-À-vis those operating only in the SEZ. However, it sought a clarification through a circular from the revenue department.
In his reply to the Interim Budget in Parliament the Finance Minister, Mr Pranab Mukherjee, said “it has been decided to remove this anomaly through necessary changes in the Act”.
In a statement issued here, the Director General of the Council said after almost three years of operation of SEZ Act, this discrimination in tax treatment has been recognised by Parliament. However, he said, the SEZ units would still have to wait till an actual amendment is carried out.
Meanwhile, the Federation of Indian Export Organisation President, Mr A. Sakthivel, hailed the cut in service tax from 12 to 10 per cent, continuance of 4 per cent reduction in central excise duty beyond March 31, 2009 and cut in central excise duty on cement from 10 to 8 per cent. He said this would help boost domestic economy albeit on a limited basis. He said that cut in service tax rates would add to export competitiveness by about 0.25 per cent, as refund of service tax is a long drawn out process and only a few exporters obtain refunds while a majority of them wait for more than a year.
Sunday, February 8, 2009
Hit by slowdown, developers put SEZs on hold
Slowdown woes are hitting special economic zones (SEZs), which were much in vogue until a year or two ago. Many SEZ projects across the country are being put on the backburner.
Two weeks ago, the board of approvals had allowed an extension to two developers who could not get their SEZ project going on time. Many such SEZ developers have been forced to delay their projects since companies have put off their expansion plans. Out of 552 approved SEZs across the country, only 274 have been notified so far. In Karnataka, only half of the 50 approved SEZs have been notified so far.
Bhaskar N Raju, Executive Director, Divyasree Developers, says, “The frenzy with which people were going ahead with SEZs two years ago — applying for six-seve SEZs — they are now now re-looking at those options. We have four SEZs. One is 60 acres and the other is 70 acres. The 60-acre plot is done with approval and going through notification. We're thinking of slowing it down or even withdrawing the application.”
Approved SEZs have three years to get notified and implemented. There are around 179 such pending SEZs across India. Some big developers are now asking for extension. But experts feel it may not be practically feasible to extend the deadline for all developers.
Mahesh Jaisingh, Director, BMR Advisors, Bangalore, says, “The criterion would be whether the net worth is above the threshold prescribed and approved at the time of application itself. Also what's going to be looked at is the repute of the developer, examination of what work has been done in the last three years.”
But for the two SEZ projects that were given extension — the period is one and two years respectively — sources say might get further extended if there is a valid reason to do so.
Thursday, February 5, 2009
Commerce ministry mulls 3-yr extension of EoU tax breaks
The commerce ministry has proposed a three-year extension of tax benefits given to Export-oriented Units (EoUs) in an attempt to encourage export industries at a time when global demand is expected to slump further.
The move will benefit more than 2,700 companies operating within the EoUs, like the Reliance Industries Ltd’s (RIL’s) 33-million-tonne-per-year petroleum refinery in Jamnagar, Gujarat.
Under Section 10(B) of the Income Tax Act, EoUs do not need to pay tax on profits provided they fulfil some conditions, including exporting not less than 50 per cent of their total production. This benefit is to expire at the end of next fiscal 2009-10.
“We have taken up the issue of extending the sunset clause by another three years,” said Commerce Minister Kamal Nath at the annual award function of Export Promotion Council for EoUs and Special Economic Zones (EPCES) here today. Sunset clause refers to a law that expires at a specified point of time.
Exports by these EoUs stood at Rs 1,54,428 crore in 2007-08, about 24.7 per cent of the total exports (in rupee terms). Chemical and pharmaceutical units account for about 18 per cent of the exports from the EoUs, followed by engineering companies at about 10 per cent.
Experts say the proposed extension will enable units in EoUs to plan better. “EoU exports have been increasing at an average rate of 20 per cent in the past 10 years, generating manufacturing activity and employment. Extending the scheme will add clarity to these units’ expansion plans, which will lead to additional manufacturing and exports as well as employment,” said L B Singhal, director general of EPCES.
Government sources, however, said a decision on this will probably be finalised only after a new government takes over after the general elections, likely to take place after April.
The EoU tax benefits were originally scheduled to expire on March 31, 2009. Last year, while releasing the foreign trade policy, Nath had announced that the scheme would be extended till March 31, 2010. This was after a committee headed by National Manufacturing Competitiveness Council headed by V Krishnamurthy had recommended the extension of the tax benefits to EoUs. A finance ministry-sponsored study, conducted by economic think-tank Indian Council for Research on International Economic Relations (Icrier) made a similar recommendation.
The EoU scheme, introduced in December, 1980, allows manufacturing units in the zones to enjoy 100 per cent income tax exemption on profits from overseas sale and also get to import raw materials duty free.
EoUs differ from Special Economic Zones (SEZs) in terms of the level and time-period of tax breaks to which they are entitled. SEZs get income-tax breaks for 15 years. They are also exempt from sales tax and excise, among other local imposts. The SEZs are governed by the SEZ Act of 2005.
EoUs are governed by the Foreign Trade Policy, which is supervised by the commerce ministry. Existing factories can be converted to EoUs, but not into SEZs.
Experts maintain that the extension of EoU benefits will not impact SEZs. “SEZs have their own benefits, which include a more comprehensive package of tax benefits as well as procedural benefits like single-window clearances. The extension will not have any impact on the zones,” Singhal added.
Sunday, September 21, 2008
Farmers take part in referendum on Reliance Group SEZ
In the first exercise of its kind in the country, landowners and farmers in 22 villages in Raigad district, about 80km from here, on Sunday expressed their opinions in a referendum on whether they supported or opposed the Reliance Group's proposed Special Economic Zone.
Thousands of farmers and landowners of villages located in Pen tehsil submitted their opinions to the state government in a form containing "yes or no" answer.
Preliminary reports said about 5,869 out of an approximately 30,000 landowners expressed their opinions.
Farmers, who had already given permission for land acquisition for the SEZ and those had possession of their property, could submit their opinions which will be compiled into a report and submitted to the state government, a senior official said.
The district authorities will take up the result of the referendum tomorrow and give a report to the government.
"Approximately 2,307 hectares of land which is under the Hetwane dam irrigation scheme is located in the 22 villages. The land is also eligible for acquisition for the SEZ," Sameer Kurtkoti, Deputy Collector (Land Acquisition Department), said.
Farmers of the 22 villages had opposed the project stating their properties came under arable land due to the irrigation project and was ineligible for the SEZ.
Amidst tight security, landowners began submitting their opinions at primary schools in their villages and the process continued from 0900 hours to 1700 hours. Video cameras were used to document the proceedings.
Over 170 government officials and hundreds of police personnel, including State Reserve Policemen, were deployed to ensure security in the region.
Saturday, September 20, 2008
CBEC wants SEZ units to be surveyed for service tax compliance
New Delhi, Sept. 19 SEZ units providing taxable services to recipients outside the special economic zones (SEZ) are under Government scanner, with revenue department officials being directed to submit by October 31 a report on whether such units were discharging their service tax obligations or not. The report is to be submitted to the Director-General of Service Tax.
The Central Board of Excise & Customs (CBEC) directive to survey the SEZ units follows a recent report of the Comptroller and Auditor General (CAG) which highlighted that certain SEZ units in Chennai and Kochi were providing taxable services such as manpower supply services, technical testing and analysis service to units / persons outside the zone without payment of service tax.
Taxable services received by SEZ units and SEZ developers for consumption within the SEZ are exempt from service tax. However, service tax is applicable on taxable services provided by SEZ units, except in situations where specifically exempted.
In a communiqué to its field formations, the CBEC has said they should ensure that SEZ units, providing taxable services to any person for consumption in domestic tariff area (or providing any taxable service which is otherwise not exempt), should register with the jurisdictional service tax authorities and discharge their service tax liability.
Meanwhile, CBEC has also clarified that SEZ units claiming refund of service tax should register with the jurisdictional service tax authorities (i e. service tax commissionerates in Delhi, Mumbai, Bangalore, Ahmedabad, Kolkata and Chennai and the jurisdictional central excise commissioners elsewhere).
Tuesday, September 2, 2008
Interview with Commerce Secretary on SEZs and land acquisition
The controversy over the threatened withdrawal of Tata Motors from Singur in West Bengal has come not a day too soon. The Singur plant is not located in any designated Special Economic Zone (SEZ).
The acquisition of land from farmers by the company and the support extended, and still being extended, by the West Bengal Government to Mr Ratan Tata in the interest of attracting investments into the State in the face of the Opposition onslaught, piloted mainly by the Trinamool Congress leader, Ms Mamata Banerjee, is something incredible.
There was trouble in Goa too where the SEZ developers are facing the wrath of the State government despite a few SEZs having been notified by the Centre. Justice demands that the developers be compensated for their sunk cost in the case of SEZs . This is needed to ensure that the promises of assured support to industrialists for investing their capital and labour to generate income, employment and manufacturing activity that would do proud to the State, are redeemed.
In both the cases, the moot point is, how far the Central and State governments would renege on their commitments to industry, particularly when faced with political choices for survival. In this case, the domestic investors who could ill-afford to squander their precious capital in endless litigation or prolonged spell of uncertainty over the future of their proposed activities.
To get an idea of what the Centre thinks about this issue here is the extracts of an interview with Commerce Secretary, Mr Gopal K Pillai.
Always courteous and candid and not to mince words in the usual officialese, Mr Pillai gave his views on SEZ, land acquisition for industrial projects and on how the Commerce Ministry hopes to transform the country’s manufacturing activity and employment generation through the vehicle of SEZs in the foreseeable future.
Excerpts from the interview:
On SEZs: Since the Special Economic Zones Act, 2005 along with SEZ Rules 2006 came into effect on February 10, 2006, over 253 new SEZs have been notified, which have established 343 units and got over a lakh of employment to people. Then, there are also 332 units in other Central Government SEZs and there are SEZs set up by States numbering 285 units.
Before 2005, there were 927 units under the extant SEZ and, post-SEZ Act and Rules, 970 units have come in two years.
SEZs get notified and it takes 12-18 months for initial infrastructure like laying roads, giving electricity and water connections and to put other amenities in place before the first unit comes up. Of 235 notified SEZs, a little less than 100 are functional, while others are in the process of building basic infrastructure; the units will be set up subsequently.
Multi-product SEZs, where the area spreads to 1,000 hectares or above, take at least five years to come up.
On SEZ land ceilings: The empowered Group of Ministers (eGoM) has fixed an upper limit of 5000 ha for the time being for the SEZ. As it is, nobody today has more than 2,000 ha in the SEZs. Let somebody set up an SEZ with 5,000 ha before the existing ceiling is raised.
The only SEZ that is coming near the ceiling figure now is the Adani Group-promoted Mundra SEZ with Mundra Port SEZ of 2,700 ha and another multi-product SEZ in adjacent site with the same acreage or so. At the moment, it is two separate companies.
Administratively, it would be convenient if the two SEZs are run as one, but the question as to whether the existing ceiling should be eased or not, will go to the eGoM.
On parallel row in Singur and Goa SEZ: In the Goa case, government acquired the land for industrial purposes in 2002, but the issue today is that the State government does not want the SEZ and has told the developers to give up the SEZ status and run the factory normally But the fact remains that neither industrialists nor SEZs can function without the approval of the State.
So if the developer gets compensation for all the investments he has made, he would go away as he is responsible to the shareholders.
In the case of the Singur, the West Bengal government has handled the situation badly. When you had a problem with the acquisition, the parties should have been compensated. There are SEZs coming up in West Bengal and there is no problem.
Bharat Forge is acquiring 4,000 ha in Pune, Maharashtra. Social activists, including Ms Medha Patkar, visited the place and were told by the agriculturists there that the company was formulating a rehabilitation package, with plans for training and social infrastructure. Sri City SEZ in Nellore, spread over 5000 acres, purchased the entire land from the farmers without any agitation or protests. The eGom is meeting this month to resolve some issues plaguing SEZs, following its meeting last month when it took three important steps.
One, for handicrafts SEZ, it decided to bring down the area to 10 ha from 100 ha.
Second, for SEZ’s authorised activities outside the SEZ, it gets refund of service tax provided the earnings is in foreign currency.
But the SEZ developers buy equipment, steel or cement for infrastructure works and do not earn foreign exchange to qualify for exemption from service tax.
But the drawback duty had the stipulation that the payment must be in foreign exchange for purchase of domestic materials to get refund. The Finance Ministry has agreed that, in such cases, even if the payment is in Indian rupees, you can pay him drawback or DEPB reimbursement.
On ‘vacant’ land issue: The Finance Ministry has taken a stance that the SEZ units in an abandoned building, even if it has a shed or foundation or a small building, would not qualify for tax breaks. But the Board of Approval (BoA) for the SEZ has taken a view that if it is a shed, the SEZ developer/unit can demolish it. Where there is a building inside the vacant land inherited by the developer that can be used as part of the non-processing area, why ask for it to be demolished?
Because, first, the developer is not claiming tax benefits and if he is asked to demolish the building, he would re-construct it and then seek reimbursement for building activities. This may look like a non-issue but the matter has been referred to the Law Ministry.
Monday, September 1, 2008
Centre shelves plan to impose export obligation on SEZ units
NEW DELHI: Here is some good news for units located in special economic zones (SEZs). The government has dropped a proposal for imposing a minimum 51 per cent mandatory export obligation on such units. There would be no changes in the present SEZ rules, which lay down that SEZ units need to be only net foreign exchange earners.
The decision taken at a recent meeting of the empowered group of ministers (eGoM) on SEZs would come as a huge relief to investors in SEZ units, both foreign and domestic, as they would not be forced to start exporting from the first year of operations.
“There are a number of cases, like the Nokia unit in Sriperumbudur, where investors did not export much in the first year. However, they started exporting a huge chunk of their total production subsequently. A minimum export obligation would take away this flexibility which units enjoy at the moment,” an official of the commerce department said.
It was the finance ministry which had proposed that the net foreign exchange earner criteria for SEZ units — which means that each unit’s exports should be more than its imports — was not enough to ensure that substantial exports take place from the units.
It said that some units could also escape by not exporting anything if their import content was low. The commerce department, however, argued that since units in SEZs get tax benefits only on the products they export, they would, on their own, want to export as much as possible. In fact, at present, more than 80 per cent of goods produced in SEZ units are exported, the official pointed out.
The proposal was debated at a number of eGoMs but no decision could be taken earlier. However, with the chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, stating earlier this year that export obligation on SEZ units was not necessary, the commerce department’s case got strengthened.
“In the recent eGoM meet earlier in August, everybody agreed that it was not necessary to impose an export obligation on SEZ units and the idea should be given up,” the official said. Exports from SEZs were estimated at Rs 66,638 crore in 2007-08. This was 92 per cent higher than exports of Rs 34,615 crore from the zones in 2006-07.
Goa to take back SEZ land from three promoters
MUMBAI: After scrapping three notified SEZs, Goa government is now planning to take land back from three promoters — Cipla, K Raheja and Peninsula Land.
For many, the government’s decision to revert the land looks an attempt to show allegiance with local villagers who have been accusing the state of being soft on SEZ promoters, even blaming it of allowing ‘backdoor entry to developers’. Goa chief minister Digambar Kamat, it seems, now wants to prove this wrong. He wants to snatch the land back from these projects.
Confiscating land, according to senior bureaucrats, is an attempt by the state to win over agitating villagers, thereby paving way for future projects. Even as industrialists point to the state’s negative growth and want Goa to rewrite its industrial policy, Mr Kamat is firm on his stand on scrapping three SEZs.
“If people don’t want (SEZs), then we will not go ahead,” Mr Kamat said. He had a ready answer to question on the impact this decision will have on the state’s investment scenario. “There are other ways for economic development, like bringing in non-polluting industries,” he said.
The tourist state is locked in a bitter battle over land with SEZ developers. The state’s decision to scrap three projects, after they were given all clearances, has landed in the court. The Centre too, is working out its response to the state’s move. Initially, though it thought of over-ruling the state’s decision, political pressure forced the Manmohan Singh government to steer clear of the issue. With the state government going a step further in taking the land back from promoters, the Centre’s reaction remains to be seen.
The development, however, has come as a big jolt to SEZ promoters. “This will force us to challenge one more decision in the court,” said a senior official of K Raheja Corp.
Tuesday, April 29, 2008
Govt. open to reviewing SEZ Act, says Nath
New Delhi (PTI): Facing flak from Opposition as well as supporting Left parties on the SEZ issue, the government on Tuesday said it is open to reviewing the law governing the special economic zones.
The Government also ruled out FDI in retail sector, an area which has come under sharp criticism from traders and parties across the political spectrum.
Allaying apprehensions expressed by members during a discussion in the Rajya Sabha on working of his Ministry, Commerce and Industry Minister Kamal Nath said, "we will review the SEZ Act if we find it requires revision."
He said only 80 to 90 SEZs have become operational and once the figure reached the 100-mark, the Government would carry out a detailed review to find out whether the law has been misused.
The debate saw Opposition members questioning the "reckless" approval of tax-free zones, with BJP alleging that most of the land "was being grabbed by land sharks to set up hotels and malls in the name of SEZs".
On the impact of FDI in retail on small traders, Nath said, "we cannot have anything which rocks the boat of existing employment."
Friday, March 21, 2008
Six new SEZ proposals cleared
New Delhi, March 20; The Board of Approval for SEZs on Thursday cleared six fresh proposals for setting up special economic zones in the country, taking the total number of such approved zones to more than 450.
The Board of Approval (BoA), chaired by the Commerce Secretary, Mr Gopal K. Pillai, took up nine proposals, of which five were granted formal approvals and one in-principle. Excluding the six approvals granted today, the board has granted formal approvals to 449 SEZs, of which 206 have been notified.
Of the five formal approvals granted today, four are for setting up IT/ITES zones by Brigade Enterprises in Karnataka, Wellgrow Buildcon and Sunwise Properties in Haryana and Smart City (Kochi) Infrastructure in Kerala.
The in-principle approval granted to Smart City (Kochi) Infrastructure was converted to formal nod today.
Also, a biotech project in Andhra Pradesh by Vivo Bio Tech Ltd was given formal approval. An engineering SEZ in Maharashtra by the Maharashtra Industrial Development Corporation (MIDC) was granted the in-principle approval, an official release said here today.
Sunday, February 3, 2008
Panel to discuss removal of tax sops for SEZs
New Delhi, Feb. 3 The Empowered Group of Ministers (eGoM), under the Chairmanship of the Union External Affairs Minister, Mr Pranab Mukherjee, is meeting here on February 4 to examine the merit of the Finance Ministry’s plea for removing a slew of tax exemptions provided to the Special Economic Zone (SEZ) and their developers.
Sources in the Government told Business Line here that the Finance Ministry has drawn the attention of the eGoM on the revenue loss on account of tax exemptions to units in SEZs which has been estimated to be Rs 1,02,621 crore for the period 2006-07 to 2009-10.
Out of this, the revenue loss due to direct taxes is reckoned to be Rs 53,740 crore and on account of indirect taxes Rs 48,881 crore.
In fact the Finance Ministry included in last year’s Budget document, for the first time, the aggregate revenue loss estimates arising out of such tax breaks to highlight the need for removing such exemptions.
The sources said that the SEZ Act came into operation only in February 10, 2006, duly underpinned by the SEZ Rules, and it was about to complete two years of its advent.
The policy has the express remit to generate additional economic activity, promote exports of goods and services and investment from domestic and foreign sources, create employment opportunities, and develop dedicated infrastructure within the zone.
Exemptions
Accordingly, SEZs were conferred certain tax exemptions including in the import/domestic procurement of goods for development, operation and maintenance of SEZ units.
They were given 100 per cent income tax exemption on export income under Section 10AA of the I-T Act for the first five years, 50 per cent for the next five years thereafter, and 50 per cent of the ploughed back export profit for the next five years.
For the developers too, income tax exemption for a block of 10 years in a block of 15 years in a consecutive order, and exemption from dividend distribution tax were provided. For both the developers and units, tax exemption was extended from minimum alternate tax, central sales tax, and service tax.
The sources said that the Finance Ministry’s target on tax exemptions granted to SEZ units and developers, particularly income tax exemptions on a graded phase spanning over 15 years particularly when they have not even completed the first five-year 100 per cent exemptions, is bound to upset the existing units or the new entrants.
They said that even before the Act completes its second year, any such scuttling of incentives embedded in the Act would create unwarranted panic among investors and potential investors, both domestic and foreign, besides injecting policy instability.
The Director General of the Council for SEZ and 100 per cent export-oriented units, Mr L.B. Singhal, said that just prior to 2000, when the SEZ policy was announced, exports from the then free trade zones were only Rs 8,000 crore, which shot up to Rs 34,789 crore in 2006-07 and are likely to be Rs 67,300 crore this fiscal.
He said the benefits derived from functioning SEZs were self-evident from the investment, employment, exports and infrastructural developments additionally generated.
The sources said the benefits derived from multiplier effect of the investments and additional economic activity in the SEZs and the employment created thus would far counterbalance the putative loss arising out of tax exemptions.
Hence, they say that the Department of Commerce would put up a stout defence in the eGoM to ensure that the hard-won incentives which had resulted in tangible gains to the economy through the SEZs-generated efficiency and income should not be nullified by any hasty withdrawal of benefits statutorily provided to investors.
EGoM meeting on SEZs deferred
NEW DELHI: (5 Feb) The meeting of the empowered group of ministers on special economic zones (SEZs), which was scheduled for Monday to look at important issues like the removal of land ceiling for Reliance’s Jhajjar project and DLF’s Gurgaon project, has been postponed.
The meeting was also scheduled to take a call on the alleged flouting of norms in Essar’s steel SEZ in Hazira.
Without giving a reason for the postponement of the meeting, commerce & industry minister Kamal Nath said a fresh date for the meeting would be decided by the EGoM chairman and external affairs minister, Pranab Mukherjee.
Saturday, February 2, 2008
MoF: SEZ sops may flout WTO rules
New Delhi, Feb 1 The finance ministry has taken a new tack in its objection to tax breaks for special economic zones (SEZs). It has said direct tax exemptions for SEZs could isolate India at the World Trade Organisation (WTO) and give scope for other countries to impose additional duties on Indian exports.
The finance ministry has insisted that it would be difficult for the government to justify these exemptions, as international conventions would treat them as export subsidies. India's trade partners could, in turn, impose countervailing duties on such exports, official sources told FE.
"Any remission, rebate or exemption of direct tax given to the export sector can be treated as an export subsidy and countervailed. But the other country has to determine if it causes harm to its domestic sector," said Anwarul Hoda, an expert on export subsidies and a member of the Planning Commission, when asked about this development.
So far, arguments over tax sops to SEZs were centred on projected revenue losses to the exchequer. But the WTO angle has given the controversy a new twist and it would be difficult for the commerce ministry to ignore the crucial objection raised by the finance ministry.
According to finance ministry estimates, the potential revenue loss due to exemptions and concessions for SEZs from 2006-07 to 2009-10 would be a whopping Rs 1,02,621 crore, of which around Rs 53,740 crore would be on direct taxes and the remaining on indirect taxes. The ministry says distortions due to this revenue loss would further make it difficult for the government to stick to its obligations under the Fiscal Responsibility & Budget Management Act, 2003.
The commerce ministry, for its part, has termed the estimated revenue loss as notional. It said the finance ministry had not taken into consideration the massive gains that would accrue from economic activity generated by SEZs. The revenue implications of the SEZ policy would now be discussed at the empowered group of ministers meeting on Monday.
The finance ministry said if other countries imposed countervailing duties on exports from Indian SEZs, it would earn them tax revenues—ironical, as the Indian government would be foregoing these tax revenues without commensurate benefits to Indian exporters.
Friday, February 1, 2008
SEZ developers may lose tax benefits
NEW DELHI: The SEZ boat may be rocked once again. The finance ministry has said that as a principle, complete income-tax exemption for SEZ developers and co-developers should be withdrawn.
North Block had earlier hinted at a minimum alternate tax (MAT) on SEZ units, emphasising that this will bring some parity with non-SEZ exporters most of whom are small exporters hit hard by appreciation of the rupee. However, such a move will require an amendment to the SEZ Act, which could be a long-winded process.
The finance ministry’s latest missive will be a major cause of concern for the SEZ programme as scores of developers have committed huge investments on the strength of tax breaks.
Highly-placed government sources said the finance ministry has sent a letter to the empowered group of ministers (EGoM) on SEZs, seeking withdrawal of direct tax sops due to revenue constraints. It has been argued that notional revenue foregone on account of SEZ tax sops would be Rs 1 lakh crore in 2008-09, and half of it would be on account of direct tax exemption. Loss of revenue could affect allocation of funds for social programmes, ministry officials feel.
The EGoM, headed by external affairs minister Pranab Mukherjee, will debate the issue next week. The plea for extension of tax holiday to STPI units, scheduled to be phased out by 2010, is also likely to be discussed by the ministerial panel.
Despite the finance ministry’s insistence, it would not be easy to withdraw the sops as the exemptions are part of the SEZ Act passed by Parliament. Imposition of tax on SEZs would require amendment to the law for which a Bill has to be piloted by the commerce & industry ministry which is opposed to withdrawal of tax concessions meant for exporters.
Speaking to ET, government sources said the finance ministry, while targeting developers and co-developers, had decided to spare units operating within SEZs from total withdrawal of direct tax exemption. This would disturb stability in the tax regime and discourage investments, a commerce department official said.
At a time when exports face a major challenge due to appreciation of the rupee, the department has been highlighting job creation by SEZs as a major achievement of the programme. It seems the finance ministry is targeting direct tax exemption on two grounds: while buoyancy in direct tax collection is strong, indirect taxes are not growing as fast, with service tax being the lone exception.
It is estimated that more than half of the Rs 6 lakh crore revenue collected during the year would be on account of direct taxes. The SEZ law grants full tax exemption for five years to the units, 50% tax exemption for the next five and tax exemption on ploughed-back profits for another five years.
Developers get tax exemption on development of the processing area where export goods are produced. They get 100% income-tax exemption for 10 years within a block of 15 years. The commerce department is likely to oppose the proposal on the ground that the SEZ Act had attracted investments from players on the basis of the sops promised in the Act. To go back on the provisions of the Act would be a breach of promise.
Although it would be difficult for the government to decide on withdrawing sops provided under an Act, the debate being generated by the finance ministry’s demand could put a shadow on the future of SEZ policy which is expected to attract a lot of foreign direct investment.
“There has to be continuity in policy if we want to attract investments. The debate is not healthy for the economy,” a source said. While the finance ministry has been expressing concern about revenue loss from the beginning, a study commissioned by the ministry was recently in spotlight as it explained that incremental economic activity and job creation justified the tax concessions.
Friday, January 4, 2008
Centre can scrap notified Goa SEZs, Nath tells CM
PANAJI/NEW DELHI: Adopting a conciliatory stand in the stand-off with Goa over scrapping of special economic zones (SEZs) in the state, Union commerce & industry minister Kamal Nath said that the Centre can review all SEZs in Goa — irrespective of whether they have been notified or not. In a meeting with Goa chief minister Digambar Kamat on Thursday, Mr Kamal Nath asked him to give in writing the reasons for scrapping all SEZs in the state and promised to take necessary action.
The minister’s statement is in stark contrast to commerce secretary GK Pillai’s comment on Wednesday that notified SEZs cannot be denotified as they were legal entities.Speaking to reporters after the meet, Mr Kamal Nath said there was “absolute provision” in the SEZ Act for everything, including review of the notified zones. “Centre can review all Goa SEZs,” he said.
“We have been assured that no SEZ, including those notified, will be allowed in Goa, if the state does not want it. The minister is very concerned and cooperative on this issue,” said Mr Kamat who along with north Goa MP Shantaram Naik and state secretary JP Singh held an hour-long meeting with the Union minister.
The Centre’s decision to back off from a confrontation could be to avoid more controversies related to SEZs, especially in the light of the violence in Nandigram which lasted for months after a decision to scrap the Salim Group SEZ project was taken.
In the meeting, the Goa CM presented three points against the proposed SEZs. Besides highlighting public sentiment against developing such zones, he is understood to have shown facts to prove that SEZs to be a deterrent to the state’s growth; and as such would not generate any income or employment for the locals here, apart from posing grave environment concerns. Mr Kamat also brought to the Centre’s notice that the claims of employment generation by SEZ developers were far fetched.
“The companies’ have misrepresented facts to us while applying for SEZs. They are unable to prove that they can generate large-scale employment. That is how we got cheated into giving permissions,” said Congress MP from north Goa Shantaram Naik.
The Centre is likely to wait for the SEZ board to examine the points made by the Goa CM, before deciding its next course of action.A day before new year, Goa had decided to ‘do away’ with setting up SEZs and wanted central government to denotify the three approved zones.
Meanwhile, the issue took a political twist with the opposition alleging that Mr Kamat is only ‘buying time’ to dampen the anti-SEZ protests in the state. “If I come to power, these SEZs will never come. I doubt if the CM is serious about the issue, I have questions about his intention,” said leader of opposition and senior BJP leader
Wednesday, January 2, 2008
Centre dares Goa, says SEZs once notified cannoat be cancelled
NEW DELHI: In a move that could lead to a direct confrontation with the Goa government over the special economic zone (SEZ) policy, the Centre has said that the three SEZs notified in the state –– pharma major Cipla’s Meidtab Specialities, Raheja’s IT/ITeS SEZ and Peninsula Pharma’s biotech SEZ –– cannot be denotified.
The Goa government that has decided not to house any SEZs is sure to find the Centre’s stand unpalatable. Moreover, the Centre also feels that the onus is on state governments to compensate promoters of notified SEZs if the door is shut on their projects. Goa chief minister Digambar Kamath is expected in New Delhi on Thursday and he is likely to meet commerce & industry minister Kamal Nath to discuss the row over SEZs.
Following a meeting of the board of approval (BoA) of SEZs, which granted formal approval to 24 proposals and in-principle clearance to four, commerce secretary G K Pillai said on Wednesday that there was no provision under law to denotify SEZs. “The SEZs that have been notified have become legal entities and cannot be denotified,” Mr Pillai said.
Mr Pillai said there could be legal consequences if the attempts were made to denotify the notified SEZs as investments has already been made in the zones. Meditab has invested more than Rs 500 crore in its SEZ. "Duty-free equipment has also started coming in. How will the state government compensate the developers," Mr Pillai said. Developers may even approach the court against the decision of the Goa government, he added.
Mr Pillai said the four remaining SEZs, which had been formally approved but not notified, could be cancelled. The ones in danger of cancellation include Inox Mercantile’s biotech SEZ, Paradigm Logistics IT/ITeS SEZ, Panchbhoomi Infrastructure’s IT SEZ and Planetview Mercantile’s gems & jewellery SEZ.
The Goa government had decided to scrap all SEZs in the state following widespread political protests initiated by the BJP and subsequently endorsed by the Congress, NCP and the Catholic Church. There have been protests against individual SEZs in a number of states including West Bengal, Maharashtra and Haryana. However, Goa is the first state where the entire policy is being challenged.
The 24 proposals given formal approval on Wednesday include Steel Authority of India (SAIL)’s SEZ at Salem in Tamil Nadu, Iffco’s multi-product SEZ in Andhra Pradesh, Dr Reddy’s pharma SEZ in AP and Orion’s IT SEZ in West Bengal.
The Centre has formally approved 404 SEZs out of which 187 have been notified. SEZs enjoy several tax sops including income tax exemption for a specified period under the SEZ Act 2005 and SEZ rules notified in 2006.