Citizens’ Research Collective on SEZ

Arun & Surabhi, The Financial Express

New Delhi, June 29, 2007: The finance ministry has objected to certain service tax exemptions for special economic zones (SEZs) businesses. This is for services they make use of outside these zones.

This may hurt export competitiveness of many SEZ units. These services include logistics, transportation and related activities. The amount of money involved is substantial, as these services are used to send shipments and buy raw materials from and to SEZs.

The move is aimed at amending the provisions of the SEZ Act 2005, which provides for service tax exemption to all services meant for authorised operations of SEZs, irrespective of whether they are rendered inside or outside these zones. The authorised operations, according to the SEZ Act, include those meant for manufacture and exports.

But the revenue department wants the exemption to be provided only for services used inside SEZs. If accepted, the proposal will substantially increase the overall costs of SEZ products, as many services will draw tax.

“Lifting of exemption will hit SEZ units hard as most of the services are rendered outside SEZs,” said LB Singhal, director-general, Export Promotion Council for export oriented units and SEZs.

The commerce ministry has opposed the revenue department’s proposal, saying that the point-of-consumption cannot be a definite criterion for determining service tax exemption.

On the service tax issue, the finance ministry, had in a notification in March 2004, stated that exemptions would be granted only for services used within SEZs. But this notification was changed in the Act and service tax exemption was provided to all authorised operations for the zones. The differences have persisted despite several discussions, with the finance ministry still insisting on exempting only services within SEZs.