ANNUAL CONFERENCE 2008

(Mumbai, 28th November, 2008)

Do the Govt of India to bleed for the Special Euphoria Zone?

M.P.Vasudevan, Superintendent of Customs

A recent news report says - "Developers and units of Special Economic Zones (SEZ) beware. Those found violating rules regarding export and import, delaying payments of fiscal penalties will soon find it difficult to escape the long arm of law, citing lack of clarity in the regulation." The report continues - "A comprehensive Bill in the form of The Foreign Trade (Development and Regulation) Amendment Bill, 2008 will shortly be introduced in Parliament."

Why all this Confusion?

The Special Economic Zones Act, 2005 (No. 28 of 2005), which has come into force from 10th February, 2006, has an overriding effect under section 51(1) of the ibid Act which reads as: "The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act" and a SEZ developed under the Act is to be considered to be outside customs territory under section 53 which reads thus: "A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations." Further neither the Foreign Trade (Develop¬ment and Regulation) Act, 1992 nor the Customs Act, 1962 define exports and imports in the context of transactions between and within SEZs. These Acts also do not have any specific penal provisions on the violations of SEZ norms. Penal provisions are prescribed in the SEZ Rules, 2005 which also came into operation along with the SEZ Act but there are no corresponding provisions in the SEZ Act. Legally, Rules notified under the Act cannot provide penal provisions if an Act do not provide them.

What are the Provisions?

The Development Commissioner (DC), of the SEZ has the powers to initiate action under the FTDR Act for violation of export and import norms by the SEZ units. The Appellate Authority in such cases is an Additional Secretary in the Commerce Minis¬try. The DC can also take the cases of violation of trading norms by the SEZ unit to the Approval Committee. The Committee can even cancel the letter of approval of the units if found guilty. The Board of Approval for SEZs in the Commerce Ministry hears appeals in such cases. The Customs Officers posted in the SEZ, who were hitherto "Proper Officer" under the provisions of the Customs Act, 1962, Customs Tariff Act, 1975, Central Excise Act, 1944 and the Central Excise Tariff Act, 1985 are, after enforcement of SEZ Act, 2005 and SEZ Rules, 2006, "Specified Officer" or "Authorised Officer" under the ibid Act and rules.

What is the difficulty of the Units?

In the case of all direct and indirect taxes, the first stage of appeal lies before the Commissioner (Appeals). However, if a SEZ unit faces wrongful imposition of duty, it cannot appeal to the Commissioner (Appeals). The absence of specific provisions in the SEZ Act for appeal in case a unit is wrongfully charged higher duties and non¬operation of the Customs Act on the units in the SEZ since they are considered to be outside the customs territory led to a situation where they had no option other than approaching the Courts for remedy. Some of the SEZ units have gone to the High Court on chargeability of export duties on their DTA procurements. It is reported that the Government may allow the units to address such complaints to the Commissioner (Appeals). A specific provision has to be made for the Commissioner (Appeals) to deal with such cases pertaining to SEZ units.

What is the loss to the Exchequer?

The Comptroller and Auditor General of India (CAG), in its report, had asked the government to review its SEZ policy as the present provisions are leading to diversion of goods in the Domestic Tariff Area (DTA) causing huge loss to the exchequer. The CAG had found that many of these units were achieving the Net Foreign Exchange (NFE) earning targets, set by the government as part of the SEZ policy, by indulging in domestic sales. The prime objective of the government to promote exports through these tax havens had thus been defeated, the report pointed out. Customs duty to the extent of Rs. 1,043 crore was foregone on imports by these units/ the CAG report said in a sample study conducted on 550 units. Quoting a major case, the CAG said its "scrutiny of records of Nokia's unit in Madras SEZ revealed that the unit had cleared mobile phones with a value of Rs. 4/855 crore in 2006 and 2007 in the domestic market without payment of any duty". The Directorate of Revenue Intelligence had in 2006-07, detected nine cases where SEZ and EOU schemes were misused and Rs. 34 crore duty was evaded. In 2005-06, the DRI had detected 14 such cases where duty evasion was worth Rs. 79.21 crore and in 2004-05 it was 30 cases where the duty evasion was Rs. 99.92 crore.

What is the fear of the Public?

In cases of detected evasions by the SEZ units, the provisions for recovery here are as laid down under the rules, which is more conciliatory than regulatory in nature. The demand or recovery of duty only through invoking the conditions of the bond or undertaking as stipulated in these rules may not have any deterrent effect as it con-stitute civil disputes. As the SEZ Act and rules do not provide for stringent provisions such as under section 135 of the Customs Act, 1962 or under section 9 of the Central Excise Act, 1944 unscrupulous elements may make the SEZ an oasis for tax evasions. By the time the Government of India realizes its mistakes and makes the necessary legal provisions to tackle the evils it may have bled a lot for these Special Euphoria Zone i.e., the SEZ?"