Govt may tweak rules to allow SEZs to sell in domestic market at FTA duties

The Finance and Commerce Ministries are discussing a certification mechanism to allow SEZ units sell part of their output in the domestic market at concessional import duties offered to free trade agreement (FTA) partner countries without causing disruption in the local market.

“The mechanism would specify conditions including rules of origin to establish and certify that an item is actually produced in a SEZ unit and not imported from another country before it is allowed to be sold in the local market at concessional import duties, if such a regime is approved by the Centre,” a Commerce Ministry official told BusinessLine .

As per the present rules, SEZs can sell in the domestic tariff area (domestic market) after paying the applicable import duties on the goods.

The Finance Ministry is concerned that allowing SEZ units to sell in the domestic market at zero or low import duties offered to FTA partners, such as Japan and South Korea, could lead to the provision being misused to smuggle in goods from other countries at low duties.

“Since SEZ units can import goods at zero duty, finished products could be imported from other countries and channelised into the domestic market without paying any customs duty if safety provisions are not in-built into the mechanism,” the official said. To get around the problem, the Commerce Ministry is planning to come up with certain rules of origin specifying the minimum value addition that has to take place within an SEZ for an imported product to qualify as originating from the zone.

“It will be on the lines of the rules of origin that we already have with our FTA partners to discourage third country imports filtering in,” the official said.

The fact that producers of goods in the SEZs have an advantage over those in the domestic area as they get exemptions from many other taxes is also another area of concern. “The Commerce Ministry has argued that since imports from FTA countries are already being allowed at nil or negligible duties without a thought to the low production costs in those countries, it could also be allowed from SEZs which are, in fact, promoting manufacturing in the country,” the official said.

With investments into the SEZs drying up following the imposition of minimum alternate tax (MAT) and Dividend Distribution Tax (DDT) in 2011, the Commerce Ministry has been looking at ways to make the zones more attractive to investors.

Over 200 SEZs are operational in the country and more than 400 SEZs have been formally approved. Total investment in SEZs is over $50 billion and the zones are providing direct employment to over 1.5 million persons, according to government figures.

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