Commerce Ministry seeks change to duty exemption for SEZ goods

Tags: SEZ, News
The Commerce Ministry has sought changes to a notification that exempted duty on goods

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from special economic zones (SEZ) sold locally to remove ambiguities and plug revenue losses.

The development follows after it was found that goods from an SEZ in Mumbai were sold in the domestic market without paying the 4% special additional duty (SAD) after an exemption clause was misinterpreted, the Customs sources said.

"As the whole issue has emerged from a notification of the Central Board of Excise and Customs (CBEC), there is an urgent need to amend that," a Commerce Ministry official told PTI in New Delhi.

"The Commerce Ministry has already asked the Finance Ministry for its amendment," he added.

Customs sources have alleged that misinterpretation of the exemption in the Arshiya Free Trade Warehousing Zone (FTWZ), situated at Panvel in New Mumbai, which comes under the special economic zone Act, has led to losses of Rs 200 crore to the central exchequer in the last fiscal alone.

"We are an infrastructure providing company and we have got nothing to do with it. Even our clients are not at fault," Ajay Mittal, Chairman and Managing Director of Arshiya FTWZ, told PTI when sought his comments.

The FTWZ policy was announced by the Centre to create trade-related infrastructure to facilitate import and export of goods and services with freedom to carry out transactions in free currency. It is covered under the SEZ Act.

Since the rules governing FTWZs have not been formalised, the vacuum has led to emergence of grey areas at these places, which are also susceptible to tax evasion, said the sources.

Some of the goods manufactured at SEZs, which have been set up to promote exports, are allowed to be sold locally or in domestic tariff areas.

Such goods, including those from FTWZs, that were sold locally, had been subject to 4% SAD and levies such as value added tax or sales tax.

The SAD was introduced in 1998 to put certain imported items on par with locally made goods, on which local taxes were levied. Imported goods were subject to 4% SAD on their value, apart from other applicable Customs duties.

In 2003, the Finance Ministry exempted SEZ-produced goods sold in domestic tariff areas (DTAs) from SAD provided local taxes were applicable on them.

There was no problem until 2011, when in a Finance Ministry circular, the words 'produced or manufactured' were replaced by 'cleared from' SEZ, a Customs source explained. After this, goods were cleared from FTWZs to local areas without paying either SAD or local taxes, the source said.

This evasion came to the notice of the Customs department and other financial intelligence agencies only this year. When the clearance of goods was halted, the development commissioner of the SEEPZ Special Economic Zone in Mumbai issued a notification aimed at enforcing the exemption, a source said.

"The Commerce Ministry has taken a serious view of the note giving SAD exemption and has issued a direction that SAD exemption should not be denied to DTAs and that any unjustified deviation would seriously be viewed and disciplinary action will be taken," SEEPZ SEZ development commissioner NPS Monga said in the circular issued late October.

The circular appeared to overrule directions issued by Chief Customs Commissioner CS Prasad on implementing the SAD notification by the CBEC.

Prasad told PTI that he had written to the CBEC to get the clarification in place. In the absence of specific regulations, individual interpretations have taken precedence and discriminatory implementation of rules is proving detrimental to safeguard.

Sources said at present goods are cleared from the Arshiya FTWZ against paying of provisional bank guarantee bond of 20% of the total duty.

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