Budget 2022: SEZs may be allowed to sell goods in domestic market with no extra customs duty

Representative image: Reuters

The Department of Commerce expects the government to finally allow units located in special economic zones (SEZ) to sell their output in the domestic market without any additional customs duty, people familiar with the matter said.

While the department has been pitching for less stringent norms for SEZ units for some time now, it’s latest push has received in-principle approval from the finance ministry and may be included in the upcoming budget, they said.

The decision stems from the fact that while SEZs have been proliferating rapidly in India, many now operate at sub-par levels and some have even suspended operations.

India currently has 426 SEZs that have been given formal approval under the SEZ Act, 2005, and 33 SEZs with in-principle approval, according to the commerce department. However, only 268 were operational as of September 30.

“The number of current units exporting fruitfully is much lower than the original expectations had by the Centre when the policy was formulated,” a senior commerce department official said.

The government now wants to give the roughly 5,600 units set up in the operational SEZs and the 2.56 million people who work there more breathing space to do business. This follows repeated representations from the industry for rules to be relaxed in the aftermath of the global trade slowdown since 2019 and the Coronavirus-led economic slump, another official said.

Domestic sales

Under Section 30 of SEZ Act, 2005, domestic sales of goods made in SEZs are restricted. Supplies from an SEZ to the domestic market – called the domestic tariff area – are treated as imports, with customs duties payable on the clearance of goods.

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. Currently, apart from customs duty, integrated goods and services tax is also paid by manufacturers in a SEZ when they sell to domestic customers.

Despite this, out of the total export production of SEZs, the share of domestic sales has risen to a high of 21 percent in the current financial year, up from 18 percent in FY21 and 12 percent in FY20.

The issue had led to a standoff between the commerce department and the finance ministry’s revenue department for many years. Recently, industry groups such as the Export Promotion Council for Export-Oriented Units and Special Economic Zones had written to the commerce department, arguing that this rule be changed.

Last year, the government informed Parliament that there had been 101 instances when SEZs were denotified between 2008 and March 2021. The reasons given for these requests for denotification included poor market response, lack of demand for space, and changes in the fiscal incentive regime for SEZs.

The revenue department had continued to reiterate its stand that permitting SEZs to sell goods in the domestic market at zero duty (the rate at which most products are imported from India’s free trade agreement partners) will cause significant revenue losses to the government.

Till last year, the revenue department had also stressed that it would provide an unfair duty advantage to SEZ units over domestic manufacturers based outside such enclaves.

FTA question

Earlier, the commerce department had sued for a compromise and proposed allowing SEZ units to sell goods in the domestic market at the lowest import duties the country offers to its FTA partners.

“Domestic companies can import the same goods made in our SEZs from foreign nations. Often, they can do it without paying any import duty if they choose to import from a country with which India has an FTA,” the official said.

This not only reduces import duty collection but is fundamentally flawed, the official stressed. The department had earlier called this practice the equivalent of a self-goal, whereby the government incentivises struggling SEZ exports, while domestic players import from abroad.

A list of problems such as competition from other nations, burgeoning imports from FTA partners, and low levels of innovation had hampered growth of SEZ exports. However, SEZ exports have witnessed an upswing recently.

Exports had fallen to $102.3 billion in pandemic-hit FY21 from $112.3 billion in FY20. In the first 7-months of the current financial year, exports stood at $ 71.4 billion, growing 31 percent over the corresponding period of the previous financial year.