Home >Politics >Policy >SEZ firms may be allowed to sell in India

New Delhi: The commerce ministry wants units located in special economic zones (SEZs) to be allowed to sell their products in the domestic market after paying the same preferential tariffs applicable to manufacturers in countries with which India has a free-trade agreement.

The proposal is part of a plan to increase the economic viability of the economic enclaves, encourage more firms to manufacture locally (thereby giving a fillip to Prime Minister Narendra Modi’s Make in India policy) and create jobs.

“The finance ministry has to be on board as there is a duty loss involved. This has been taken up quite strongly by the commerce minister (Nirmala Sitharaman) with finance minister Arun Jaitley. We are expecting an announcement in the upcoming budget," said a commerce ministry official, speaking on condition of anonymity.

The official admitted that this could mean an undue advantage to units in the SEZs over those located elsewhere but said this was a better option to favouring “companies operating in" countries with which India has a free-trade agreement (FTA).

“We should be promoting our own SEZs," this person said.

The commerce ministry has also consistently lobbied the finance ministry to exempt units in the SEZs from the minimum alternate tax, or MAT, imposed on them in 2011. The tax runs contrary to the spirit with which the SEZs were set up.

Speaking at a conference on India’s future trade policy priorities, jointly organized by the Confederation of Indian Industry (CII) and Centre for WTO Studies, India’s chief trade negotiator and additional secretary Arvind Mehta said what the commerce ministry is currently saying is that no SEZ can only work simply on the principle of exports and some of its produce has to go to domestic tariff area (DTA).

“If you have done free-trade agreements (FTA) with Japan, South Korea, Asean (Association of Southeast Asian Nations) and many more, do a FTA with the SEZs. Let them export goods to the DTA at tariffs not higher than you allow other FTA partners. This way you will be doing more of Make In India and manufacture more," said Mehta.

Arpita Mukherjee, a professor at Indian Council for Research on International Economic Relations, said that the idea of giving access to SEZs to the DTA at the lowest FTA tariff is a good idea, but that the government first needs to make the SEZ policy WTO compatible.

“By forcing SEZs to be net foreign exchange earners, the government has kept our SEZ policy open to challenge in the WTO. We need to put investment conditions, or any other performance parameter, which could make our SEZs consistent with multilateral trade rules," said Mukherjee.

Falling global demand has hit SEZs as they are allowed to sell within the country only if they pay the customs duty on the product, since such enclaves are considered to be situated outside the tax jurisdiction of the country.

A study on SEZs last year by Indian Council for Research on International Economic Relations held that since India has signed a large number of FTAs over the years, which have brought the preferential tariff on various products much lower than the most-favoured nation rates, this has put the SEZ units at a relative disadvantage in selling in the domestic market.

After the government imposed MAT and dividend distribution tax (DDT) on the SEZs in 2011, investor interest in SEZs dwindled significantly with many developers seeking to denotify their SEZs.

While the commerce ministry has been demanding reversal of MAT and DDT on SEZs, imminent loss of revenue in a tight fiscal situation has prevented the finance ministry from doing so.

Answering a question in Parliament, Sitharaman in November said the finance ministry has rejected such proposals by her ministry. This is despite finance minister Jaitley promising in his first budget in July 2014 that the government is committed to reviving SEZs and making them effective instruments of industrial production, economic growth, export promotion and employment generation.

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