SEZ - EOU and DTA units - Level Playing Field
CAG in its Report No. 21 of 2014 to Parliament observes,
EOUs get duty free imported/indigenously procured raw materials and subject to certain conditions are even allowed to sell their finished goods into Domestic Tariff Area (DTA) after paying the applicable Basic Customs Duty (BCD) and Countervailing Duty (CVD) as if the final products were imported.
However, in cases where both the BCD and the CVD were ‘nil', the EOU would not pay any duty on clearance of the final products in DTA. A unit in the DTA producing/clearing same final product would also clear these goods at ‘nil' rate of duty, but would have suffered duty on inputs used in the manufacture of these products. This had put the DTA units under a comparative disadvantage. To remove this anomaly, the EOUs were required to pay back the duty forgone on inputs utilised for manufacture of such goods cleared into DTA at ‘nil' rate of duty with effect from 1st September 2004.
However, such protection to units in DTA was not provided under the SEZ policy/Act. SEZ units can sell their goods, including by-products, and services in DTA on payment of applicable duty including at ‘nil' rate with no requirement to pay back the duty forgone on such inputs used. Proportionate duty forgone on inputs utilized in the manufacture of finished goods cleared at nil rate in DTA works out to Rs. 84.19 crore in 20 SEZ units in Andhra Pradesh, Maharashtra, Gujarat, Uttar Pradesh and West Bengal which could not be recovered in the absence of enabling provisions. Additionally, this policy had put SEZ units at a distinctly advantageous position compared with similar units in the DTA or even other EOUs.
A similar case of inverted duty structure was observed in three Units in Aspen SEZ, Coimbatore, Tamil Nadu who were granted LOA in 2007 for manufacture of parts of Wind Mills. The SEZ units were encouraged to clear more into DTA in view of the lesser rate of customs duty on Wind Mill parts which ranged between 5.30 and 7 per cent in terms of exemption Notification No. 21/2002 - Cus dated 01 March 2002 whereas the rate of duty payable but for the exemption on the inputs utilized in the manufacture of finished goods ranged between 14 and 21 per cent. However, in the absence of enabling provisions, the proportionate duty concession amounting to Rs.155.00crore availed by these three units on the raw materials consumed in the manufacture of finished products sold in DTA could not be recovered which would have otherwise discouraged such DTA sales.
Department's Reply: the Units under SEZs operate under the different tax regime compared to EOUs.SEZ units have to pay full duties while clearing the goods into DTA whereas EOUs have concessional duties.The SEZ and EOUs operate under different legal framework and have prescribed entitlements and obligations.
Reply of the department is not acceptable to audit as in the case of final goods cleared in the DTA with nil rate of duties, by SEZ, EOU and DTA units, the EOUs are required to pay back the duty benefits availed while importing the raw material, similarly DTA units also bears the duty liability on the imported inputs, SEZ units while clearing the goods in DTA need not pay any duty benefits availed on the inputs, thus putting both EOU and SEZ in a disadvantageous position.
Recommendation: CAG wants the Government to consider recovering duty forgone on inputs utilised for manufacture of finished products, on clearance of such exempted goods in DTA, as is done in the case of EOUs.