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Bigger local play sought for SEZs

The commerce ministry has invited views on whether special economic zones (SEZs) can be allowed to sell locally at concessional customs duty, as it casts around for ways to make them more competitive and attractive to foreign investors.

The suggestion, mooted in a discussion paper, comes in the backdrop of SEZs becoming less appealing to investors following partial withdrawal of tax incentives this fiscal. A pitch has also been made for extending export incentives to SEZs at a par with domestic units.

Commerce secretary Rahul Khullar, however, clarified that promoting sales from SEZs to the domestic market or the DTA (domestic tariff area) is not a line that the commerce department had taken, but just an idea floated based on its discussion with various stakeholders.

"It is just a discussion paper and we have invited views on the future course of action to be taken." A discussion paper on potential reform of the SEZ policy has been prepared by the SEZ division of the commerce department and has been put in the public domain for wide stakeholder consultation.

India's large and growing domestic market, gives it an edge over other countries, the paper says, adding that the existing SEZ policy seeks foreign direct investment (FDI) for setting up units with export obligation and restricted access to the domestic market.

While SEZ units can sell in the domestic tariff area, they must pay customs duties on sales as these are deemed foreign territories. "DTA sale entitlement on concessional duty, to the extent of say 50% of total exports made by a unit, could specifically be considered to attract FDI in the manufacturing sector," the discussion paper says, adding that the concessions could be in line with the policy for EOU, or export oriented unit, which allows 50% concession on custom duties on most products sold in the DTA.

To enable SEZ units to compete with products sold by India's free trade agreement (FTA) partners, the commerce department has proposed that the concessional customs duties applied on the foreign products should also be applied on SEZ products.

If the same duties are not applied on SEZ sales, then manufacturers keen on exploiting India's domestic market would find it more profitable to set up units in the FTA partner countries and export to India at concessional rates.

"India thus loses the investment, employment and technological upgradation advantage that could come by attracting large manufacturers," the proposal says.

"It is not just foreign investors. Indian investors, too, are setting up manufacturing units in countries like Sri Lanka and Singapore to take advantage of tax concessions in those countries and export products to India at concessional import duties, thanks to the FTAs," said SEZ unit-owner Rakesh Sonthalia who is the former president of the Export Promotion Council for EoUs and SEZs.

Allowing SEZs to sell in DTAs paying the same customs duties will give units a level playing field and make SEZs more attractive, Sonthalia added.

While the imposition of minimum alternate tax of 18% and dividend distribution tax of 12% has affected SEZs across the board, the measures to boost domestic sale would only help a few sectors, said Hitender Mehta, partner, Vaish Associates Advocates.

"Units manufacturing goods that have large domestic demand, and where manufacturing is competitive visa-vis importing, would definitely gain, but sectors like petroleum will be left out," he said.

Making a case for giving benefits like duty drawback and focus product and focus market incentives to exports from SEZs, the paper says that with the introduction of MAT and DDT, and the impending direct taxes code that could shrink benefits further, a level playing field must be given to SEZs.

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