Mumbai: The Mumbai income-tax (I-T) department is investigating two jewellery companies for possible tax evasion by misusing incentives provided to firms that manufacture products in the so-called special economic zones, or SEZs.
If proven, these are likely to be the first such instances to come to light, although an official in the I-T department says they could point to an emerging trend.
Companies operating in SEZs are eligible for tax incentives and other benefits. Several instances of companies operating in these zones misusing import tariff exemptions have already come to light.
The official in the I-T department, who did not want to be named, said the two companies had units in SEZs in Gujarat but that these units were not operational.
“During our physical inspection, we found that manufacturing units of these firms in the SEZs were not functional. But they have been claiming tax exemption on the export of products manufactured in these non-existent units. We have gathered all evidence against these companies.”
The official declined to name the firms or state the extent of the evasions, but said the Mumbai I-T department is investigating the cases as the owners of these companies have been filing tax returns with it.
Mint could not independently ascertain the names of these companies.
The government provides incentives to companies setting up units in SEZs in an effort to promote manufacturing and exports in specific regions, encourage investment and create jobs.
Under India’s income-tax Act, companies are completely exempt from paying taxes for the first five years on export income from products made at SEZs. For the next five years, they have to pay 50% of the taxes.
Such units also enjoy an exemption on minimum alternate tax (MAT) norms. If the total taxable income of a company is less than 30% of its book profits, the firm is usually required to pay a minimum alternate tax, which is 10.5% of its book profits.
The government has all along suspected that some firms setting up units in SEZs do so with an eye on misusing these incentives.
India’s minister of state for finance S.S. Palanimanickam told the Lok Sabha in March 2007 that the government had detected 80 cases of misuse of customs concessions granted to SEZs, which resulted in revenue losses of Rs143.94 crore since 2002-03, according to news agency PTI. The government had been able to recover only Rs1.50 crore, the minister told the House.
In October 2007, The Economic Times reported that the Central Board of Direct Taxes (CBDT) had ordered inspection of income-tax returns of firms in SEZs for possible tax evasion. CBDT had called for such scrutiny on recommendations of a parliamentary committee on finance.
The I-T department official termed the evasion by the two jewellery firms “an emerging trend” that was resulting in the government “losing a lot of money”. “We have alerted all our offices to watch out for such evasions by units in SEZ across the country,” he said.
“The leakage is possible in two ways,” said Sachin Menon, executive director at global audit and consulting firm PricewaterhouseCoopers. “Goods produced in SEZs (for exports) could be diverted to domestic tariff areas instead...or goods manufactured outside SEZs can be branded as manufactured in SEZs to get tax exemptions.”
These companies could also be resorting to such practices to avail customs duty concessions in addition to avoiding taxes, as savings from such tax exemptions aren’t significant, Menon added.
Companies importing raw material for production at their SEZ units could be diverting the goods for domestic manufacturing, and then exporting locally made products to meet export obligations, Menon said.
Such instances of misusing SEZ provisions, however, may not be widespread, said Sudhir Kapadia, partner at audit and consulting firm Ernst and Young India Pvt. Ltd. “In my view, just because there are specific instances of assessees attempting to misuse the provision does not mean that it is prevalent,” said Kapadia. “Such cases of evasion can be easily detected by the income-tax department.”
With 8,625 hectares marked for SEZs, Gujarat accounts for 33% of the total notified area for such zones in India. Currently, Gujarat has four functional SEZs—Surat Apparel Park SEZ, Kandla SEZ, Mundra Port and Special Economic Zone Ltd (MPSEZ), and the multiproduct Surat SEZ that was set up by the Diamond and Gem Development Corp.
Currently, the Union government has approved 531 SEZs formally, while 143 regions have been given in-principle approval and 260 have been notified which means firms in these are eligible for fiscal and other incentives. Total exports from SEZs across India nearly doubled to Rs66,638 crore in 2007-08 from Rs34,615 in 2006-07.