SEZ Act needs overhaul: CBEC

The Central Board of Excise and Customs (CBEC) has recommended an overhaul of the Special Economic Zone (SEZ) Act 2005 saying it has detected gross violations of duty and tax concessions causing it to suffer a revenue loss of Rs 1,75,000 crore to date.

Broadly, the CBEC report has sought the removal of numerous exemptions, drawbacks and concessions that have turned SEZs into tax-avoidance conduits for importers and exporters without any genuine business to back them.

Official sources said this report forms part of the board's recommendation to the ministry of finance for amendments in Budget 2010-11.

The CBEC's revenue loss estimate Rs 1,75,000 crore has been derived from concessions extended for capital goods and raw material procured by functioning SEZs developers and those that have been approved and are being set up (SEZs in the process of starting operations have to provide import estimates).

The CBEC had estimated an overall revenue loss of Rs 3,50,000 crore involved in the creation of all SEZs since 2006, when the Act was passed.

The board has submitted its recommendation based on investigation of its field formation towards the end of 2009.

A committee set up under CBEC revealed that the SEZ scheme is subsidising builders for developing residential townships near big cities. SEZ rules specify that at least 25 per cent of the area should be used to develop processing areas for imports and exports. This means 75 per cent of the area in an SEZ comes under the "non-processing" category and is freely available for developers.

As a result, several multi-product SEZs have come up with proposals to develop complete townships adjoining the major cities with residential and recreational areas with facilities like entertainment complexes, multiplexes, golf courses, educational institutions, hospitals and so on.

Since these townships are being developed within the SEZ, the cost of capital goods, equipment and raw materials is duty-free.
In view of this, CBEC has recommended that the SEZ Act should make it mandatory to earmark at least 75 per cent of the area in an SEZ for import and export processing.

To avail of exemptions, the CBEC has also recommended that the developer and co-developer of the SEZ should execute a bond-cum-legal undertaking that includes a bank guarantee of at least 5 per cent of the value of imports. This is because the CBEC has found it difficult to recover duties foregone if a unit imports goods under the scheme and the project does not take off within the SEZ.

The report has also suggested redefining the term "exports" by deleting the provision that allows exports to include supplying goods from one unit to another in the same or different SEZ. Investigations have found that the provision enables exporters to claim concession by transferring goods to another SEZ without physically exporting anything.

Also, both the finance ministry and the commerce ministry -- the nodal administrative ministry for SEZs -- should reach a consensus before an SEZ is notified, the report says. Further, provisions of the Customs Act and Central Excise Act should be made applicable to SEZs for recovery of interest, fines or penalties if a unit fails to utilise exempted goods for authorised operations or is unable to account for the goods it imports. Currently, these provisions are exempt under SEZ Act.

Among the other key recommendations are provisions for the valuation of goods under the Custom Valuation Rules 1988, surprise checks by custom officials to examine goods and the introduction of documents for SEZs that procure goods domestically (many tend to show these purchases as imports to benefit from duty concessions).

The report has also said, the direct delivery facility without custom assessment at present prevalent only for movement of all goods within SEZs, should be restricted to emergency cargo and units with impeccable track records.

From the security perspective, CBEC has suggested that cargo, vehicles, documents and people passing in and out of SEZs should be made open to custom surveillance, both physically and through close circuit television as an anti-smuggling measure.