Taxing SEZs

The passage of the 122nd Constitutional Amendment Bill a few days ago has set the GST ball rolling. But even as the shift to a new regime has acquired a sense of urgency and momentum, it has given rise to uncertainties in some quarters. One of these is the impact of GST on the tax treatment of Special Economic Zones (SEZs). Under the present system, imports by SEZs are not charged excise duty and central sales tax (a levy of 2 per cent on inter-State transactions). However, some States levy value added tax. SEZ representatives have rightly argued that the provision in the model GST law that spells out zero-rated supplies should include those from the domestic tariff area (DTA) to the SEZs. But laying this out in black and white will require the consensus of the States concerned.

To shore up the already flagging spirits of SEZs in an adverse global economic climate, the existing tax incentives should not be tampered with. The supply of goods from the DTA to an SEZ should not attract CGST or SGST, even while suppliers should be allowed to claim input credit. Once this is decided, the question that remains to be sorted out is the manner of implementation. A committee looking into the tax refund process for GST has held that exemptions should be avoided for their impact on the tax credit system. If this is extended to SEZs — that is, if goods or services supplied to these units are to be taxed and refunded later — the Centre and States will have to ensure that SEZs are not made to run from pillar to post to get their money back. Since GST is meant to make tax compliance easier, it should not inconvenience SEZs in the process. While GST countries such as Malaysia have allowed upfront exemptions instead of refunds, India should weigh the options carefully and come up with an institutional solution.

There can be no denying that SEZs have lost their sheen. Between 2009-10 and 2013-14, the growth rate of their exports fell behind export growth for the economy as a whole. Even as these units employ 1.5 million people, the finance ministry and CAG have raised questions on whether the direct tax and indirect tax sops bestowed on them are worth it. As a result, SEZs were, rather unfairly, made to pay ‘minimum alternate tax’ with retrospective effect from 2011-12, which seems to have eroded investment interest. There has been a trend of these units giving up their status and preferring to be regular domestic entities . SEZs have been a bone of contention between the ministries of finance and commerce. The latter has suggested that in view of an adverse export scenario, SEZs should be allowed a foothold in the domestic market by lowering the ‘import duty’ applicable on their goods and services to FTA rather than the regular rates. Given that the impact of such a move on imports is uncertain, the Centre could reduce MAT for starters and then study GST-related options. SEZs are too important to be orphaned.

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