India mulls SEZ Act change to let units sell locally at lower taxes amid US tariff hit

New Delhi: In a step to offset the trade damages due to the US tariff, India has exhumed a shelved proposal to amend the Special Economic Zones (SEZ) Act that would allow units within SEZs to sell their goods in the domestic markets at lesser taxes.

The key fiscal benefit of the proposed amendment is to allow SEZ units to sell their goods in the domestic tariff area (DTA) on a ‘duty foregone basis’ where the seller units would have to pay Goods and Services Tax equivalent to the duty relief they availed while importing the inputs for the goods sold in the DTA.

“Resultant goods manufactured or processed in a Unit using imported inputs when removed to the DTA shall be chargeable to: i) duty of customs equal to the exemption availed on inputs under Section 26 of the Act; and ii) duty of customs equal to the amount of drawback if any, claimed under Section 75 of the Customs Act, 1962 and other benefit if any, availed under the Foreign Trade Policy on the goods used as inputs in such resultant goods,” says the proposal.

The duty foregone benefit in DTA would be restricted to only goods covered under the GST Act. Duty leviable on goods falling under Schedule IV of Central Excise Act (Petroleum and Tobacco) as well as Electrical Energy falling under Schedule I of the Customs Tariff Act, 1975, when cleared from SEZ to DTA, will not be on duty foregone basis.

Currently, supplies from SEZs to DTA are treated on par with general imports and are subjected to customs duty on the full value of such supplies, thereby making them uncompetitive.

Consequently, SEZ units are forcibly cut off from accessing domestic markets even if they fulfil net foreign exchange earning norm or other obligations of SEZ law.

Such lack of integration with domestic markets was a primary reason for the failure of SEZs to attract investments in manufacturing sector.

The proposed amendments also enable SEZ units to do job work for domestic manufacturers or seek inputs while allowing their payment in Indian rupees. “Sub-section (2)(ii) seeks to provide for surrendering the benefit availed on the inputs supplied by the DTA unit under the Drawback Scheme or under the Foreign Trade Policy,” the proposal adds.

Besides encouraging large-scale manufacturing and integration with global supply chains, these changes are designed to enhance the attractiveness of SEZs for both domestic and global investments and support government initiatives like Make In India and Atmanirbhar Bharat, says the proposal.

This would help optimize the utilization of idle capacity and catalyze new manufacturing units in SEZs, thereby bolstering their integration with the domestic economy.

The proposed norms also empower Central and state governments under an inserted Section 30 B to hand out facilitative schemes for SEZs, including access to credit and simplified compliance measures.

These may include measures to provide access to credit and working capital, financial schemes in relation to authorised operations, product linked incentives, relaxations from Central or state acts, expedited clearances, simplified compliance requirements and other such benefits and incentives.

The proposed amendments were conceptualised in July 2022 as a new law Development (Enterprise and Service) Hubs Bill of 2023 to replace the SEZ Act. Later, in October 2023, it was thought best to introduce them through suitable amendments in the SEZ Act itself.

However, the proposal remained sidelined until July 16 when it was exhumed following US President Donald Trump’s April 2 declaration of ‘reciprocal tariffs’ on all countries. The US put ‘reciprocal tariffs’ on pause threatening to reintroduce them on July 8. They were finally effected by the US on August 7.