Citizens’ Research Collective on SEZ

Sunny Verma & Arun S, The Financial Express

New Delhi, June 29, 2007: A host of companies from sectors such as steel, auto components, electronics, telecom, chip manufacturers and IT/ITES, among others, may have to rethink their ambitious investment plans for special economic zones (SEZ) as the government wants to indirectly debar them from selling goods in the lucrative and big domestic market.

As reported by FE on Thursday, the finance ministry and commerce department have agreed on treating certain goods purchased by these SEZ units from the domestic tariff area (DTA) as ‘imports’ – a move that would indirectly impose greater export obligations on these units.

Experts said the government’s move has the potential to slow down investment in SEZs. They added many SEZ companies eyeing domestic market would now find it extremely difficult to meet the positive net foreign exchange criteria as specified in the SEZ Act.

Mukesh Butani, founder partner of BMR & Associates, said: “It looks like SEZs—with most backward and forward linkages with the DTA and those with plans to sell more in the DTA—will have to make provisions for these new changes after studying the eventualities and focus on exports. Sectors like IT, chip manufacturers and auto ancillaries are likely to be affected.” But Butani added that it is too early to fully assess impact of the proposed change.

People tracking the SEZs units argue the new norms would undermine their flexibility. These would enable SEZ companies to sell goods in DTA only to the tune of ‘value addition’. Also, in case these units are not able to bag export orders for certain reasons, they will be forced to pile up inventories.

While finance ministry’s view is that this crucial change would prevent the misuse of tax incentives by SEZs, experts say there are no revenue leakages in the existing regime. The finmin further believes that the new norms will force SEZ units to export a greater chunk of the production.

Vivek Mehra, executive director, PricewaterhouseCoopers, said: “When you sell in DTA, you have to pay full customs duty and countervailing duties on the goods and duties on value addition. It is not economically viable for SEZ units to sell more in the DTA unless the duty structure is very low. But currently the duties are very high in many sectors. SEZ units can make profits only if they target the export market.”