Retrospective Electric Shock to SEZs - Defies Laws of Physics but well within Laws of Taxation
NORMALLY when you get into contact with a live wire, you get a shock at that very instance and that terrible experience remains with you for the rest of your life. But here is one shocker which defies the laws of physics and that shock is delivered by the Central Government to Special Economic Zones (‘SEZs') where the SEZs were administered an electric shock in this Budget with retrospective effect.
Provisions of SEZ Rules, 2006 with regard to surplus power:
In terms of sub-rules (3) and (4) of Rule 47 of Special Economic Zones Rules, 2006, surplus power generated in a SEZ may be transferred to Domestic Tariff Area (‘DTA') on payment of duty on consumables and raw materials used for generation of power. Duty on sale of surplus power to the DTA shall be as provided for in the said Rule. Further, as per sub-rule (4) ibid, valuation and assessment of the goods cleared into DTA shall be made in accordance with the Customs Act, 1962 and the Rules made there under.
A brief recap on the history of customs levy on electrical energy:
In the Customs Tariff Act, 1975, ‘electrical energy' is classified under Chapter 2716 00 00. In the year 2008, by virtue of Clause 72 (i) of the Finance Bill, 2008 read with second schedule thereto and the declaration under the Provisional Collection of Taxes Act, 1931, a tariff rate of Rs. 2000 per 1000 kWh was fixed as basic customs duty (‘BCD') for ‘electrical energy' under Chapter 2716 00 00.
However, by virtue of S. No. 573 of Notification No. 21/2002-Cus dated March 1, 2002 inserted vide an amending Notification No. 21/2008-Cus dated March 1, 2008, all goods falling under Chapter 2716 00 00 attracted ‘Nil' rate of BCD.
Cut to the Present:
In Finance Bill, 2010, vide Clause 60 read with second schedule thereof, Notification No. 21/2002-Cus is proposed to be amended retrospectively from June 26, 2009, by substituting S. No. 573 and the entries relating thereto, with S. Nos. 573 and 573A and the related entries.
As per this proposed amendment of S. No. 573, ‘electrical energy' falling under Heading 2716 00 00 removed from a SEZ into DTA or non-processing areas of Special Economic Zone (‘NPAs of SEZ') will attract a BCD of 16%. Further, in terms of S. No. 573A, all goods falling under Chapter 2716 00 00, other than those mentioned at S. No. 573, shall attract a BCD of ‘Nil', when imported into India .
Similarly in terms of S. No. 2 of second schedule ibid, Notification 20/2006-Cus is proposed to be amended retrospectively from June 26, 2009 whereby all goods falling under Chapter 2716 00 00 shall attract a ‘Nil' rate of additional duty of customs under Section 3(5) of Customs Tariff Act, 1975 (popularly known as ‘SAD').
Further, in terms of Clause 60 of Finance Bill, 2010 Courts/Tribunals are barred from interfering with this levy and the Government shall recover the duties liable to be paid by the SEZs on the said ‘electrical energy' cleared to DTA or NPAs of SEZs with retrospective effect. The mechanism for recovery of duty for the past period may be probably revealed when Finance Bill, 2010 is enacted into law.
Effective date and rate of levy:
Since the provisions of Clause 60 read with second schedule of the Finance Bill, 2010 will come into effect only from the date of its enactment into law, the Central Government has issued Notification No. 25/2010-Cus exempting electrical energy under Chapter 2716 00 00 from BCD with an exception that this exemption shall not be applicable to electrical energy removed from SEZs to the DTA or NPAs of SEZs. Likewise, Notification No. 26/2010-Cus was issued to exempt electrical energy from the levy of SAD and this exemption is applicable even to SEZs.
These Notifications are operative with immediate effect and they shall remain in force till the provisions of Finance Bill, 2010 are enacted into law and the amendments proposed to Notifications 21/2002-Cus and 20/2006-Cus take effect retrospectively.
It may be noted that there is no levy of additional customs duty under Section 3 (3) of Customs Tariff Act, 1975 (popularly known as ‘CVD') because ‘electrical energy' does not attract any excise duty in terms of Central Excise Tariff Act, 1985.
As a result of this budgetary exercise, all SEZs shall have to pay a BCD @ 16% on electrical energy which is removed from the SEZs to DTA or NPAs of SEZs with effect from June 26, 2009. However, the recovery mechanism for the past liability i.e. from June 26, 2009 till February 26, 2010 is yet to be notified while the new levy shall come into force by virtue of Notification No. with effect from February 27, 2010.
As stated above, by virtue of Rule 47(4) of SEZ Rules, 2006, the valuation and assessment shall be in accordance with the provisions of Customs Act, 1962 and the Rules made thereunder. In effect, provisions of Section 14 of the Customs Act, 1962 read with Customs Valuation Rules, 2007 amongst others will be made applicable for computing the assessable value of electrical energy for levying customs duty.
DTA clearance/clearance from processing area to non-processing area and duties thereon
As per the Guidelines for Power Generation, Transmission and Distribution in Special Economic Zone (SEZs), issued by the Department of Commerce vide N.o dated 27th February, 2009,
In respect of power supplied from processing area to constituents in non-processing area or from processing area/ non processing area to DTA, it should be at such a price as agreed by the regulator and the unit. For such clearance, the quantity of duty shall be leviable at such rate as may be notified as customs tariff by the Department of Revenue on the advice of the Ministry of Power and the Ministry of Commerce, read with Section 30 of SEZ Act, 2005. Such power plants would ensure maintenance of separate meter for supply of power from processing to constituents in non processing area or from processing area to DTA and amount of power so supplied should be submitted to the Unit Approval Committee for every quarter.
This was issued sometime in February 2009 and the revenue Department took the opportunity of the 2010 Budget to give this little retrospective shock to the SEZ power units.
The Pranab Effect:
In the regime of UPA-I, the erstwhile Commerce Minister had the habit of going to town announcing tax sops to EOUs/SEZs taking the erstwhile Finance Minister by surprise. Sir Winston Churchill once said, “A lie gets halfway around the world before the truth has a chance to get its pants on.” This quote aptly summed up the tussle for tax sops between the erstwhile Commerce Minister and the Finance Minister.
It appears things have changed dramatically in the current regime of UPA. The current Finance Minister, who is considered the de facto number 2 in the Union Cabinet, thought it wise to take the first lead and pre-empt any soppy moves from the Commerce Ministry by delivering a shocker punch to the Commerce Ministry's pet project viz., SEZs even before it could realise what struck them from the above (or rather below).
And the Finance Minister made no mention of the shock in his budget speech.