Budget 2015 Axes Factory Tax Rebate On Sez Supplies

India's much-hyped tax-free export zones seem to have lost a key benefit without gaining any relief from the minimum alternate tax in the budget. Tucked away in the fine print of the budget and having the potential to deal yet another blow to special economic zones (SEZs) is a provision that withdraws rebate on factory tax on supplies to these conclaves.

Budget 2015-16 seeks to specifically redefine the term 'export' in the excise law provision that governs rebate on the levy to mean taking goods out of India to a place outside India. With the insertion of this specific definition, the benefit of rebate on excise duty appears to have been restricted to exports out of the country.

Excise duty is levied at the time of clearance of manufactured goods from the factory premises of the manufacturer. Manufactured goods, when exported out of India, can be cleared against bond without payment of excise duty. Alternatively, on clearance of manufactured goods for export, excise duty paid on clearance can be claimed as rebate subject to conditions.

Since SEZs are considered deemed foreign territory, supplies made to SEZs are considered as exports as well. Therefore, the facility of rebate was extended to supplies made to SEZs as well.

The new definition places a restriction that runs contrary to the intention of the SEZ Rules as supplies to SEZ are also considered as export. The domestic supplies to SEZs enjoy the export benefits in terms of Foreign Trade Policy as well as duty drawback.

The commerce ministry had sought a re-look at the taxation regime for SEZs, especially minimum alternate tax and dividend distribution tax, to turn around the scheme that has seen investments languish after imposition of these taxes. So far, 491 proposals for SEZs have been formally approved by the government, but only 199 zones are operational, accounting for about 25% of India's total exports. Exports from these zones increased from Rs 22,840 crore in 2005-06 to Rs 4.94 lakh crore in 2013-14.

The move runs contrary to the recent move by the government that allowed dual use of SEZ infrastructure as it aimed to revive these zones.

Tax experts say the move deals a big blow to SEZs and manufacturing as a whole. "Restricting the facility of rebate to physical exports is not envisaged under the provisions of SEZ Rules and places the suppliers effecting such supplies at a disadvantage specially when other export incentives and duty drawback benefits are available on such supplies," said Pratik Jain, partner, KPMG.

Further, rebate benefits on SEZ supplies was a way to deal with inverted duty structure for some companies and its apparent withdrawal doesn't help the 'Make in India' campaign, Jain said, and sought a suitable clarification in the definition of export to include supplies to SEZ.

Source : economictimes.indiatimes.com