Of SEZs and taxes

Readers of this column have sent a number of queries regarding setting up units in special economic zones (SEZs). I answer some of them here, assuming the normal basic Customs duty of 12.5 per cent and excise duty of 16 per cent.

SEZ units and units set up as export-oriented units (EOUs) can import capital goods at zero duty, whereas units in the domestic tariff area (DTA) have to pay at least 5.1 per cent duty under the export promotion capital goods (EPCG) scheme. SEZ units can import construction material at zero duty whereas EOU and DTA units can import at 36.74 per cent duty.

For exports, SEZ, EOU or DTA units can import raw materials, etc without paying duty. Raw materials from DTA can be procured for export production by all the units at almost the same price as deemed exports or as physical exports. EOU and SEZ units can disburden the central sales tax (CST) incidence, whereas DTA units cannot.

The VAT (value added tax) burden can be nullified by all of them through input tax credit (for EOU/DTA) or refund (for SEZ). The service tax burden also can be nullified through Cenvat credit (for EOU/DTA) or exemption (for SEZ).

EOU or SEZ units can get raw materials for domestic production from DTA units at near-international prices under deemed exports or as physical exports. The DTA units will have to pay more as suppliers will not get any benefits and the CST burden cannot be got rid of.

However, on local sales, DTA units will pay excise of only 16.32 per cent, all of which can be taken as Cenvat credit whereas EOUs will pay about 20.35 per cent (plus VAT), out of which only 16.83 per cent can be taken as Cenvat credit by the DTA buyers.

SEZ units will be the worst-placed as they will have to pay 31.48 per cent (plus VAT), out of which only 18.36 per cent can be taken as Cenvat credit.

DTA units get no income-tax (IT) exemption, whereas an EOU can get exemption on 90 per cent of the export profits till 2009, whereas SEZ units can get 100 per cent exemption in the first five years, 50 per cent in the next five and 50 per cent for the next five years, subject to certain conditions.

The other benefits to SEZ units such as exemption from electricity duty, hassle-free environment, etc ought not to make a huge difference in the decision to locate units.

EOU and DTA units can buy land anywhere and start their activities and enjoy the benefit of appreciation of land value. In SEZ, the units can only take land on lease from the developers.

The price at which the EOU or DTA units will get infrastructure like access roads and utilities might be quite different (mostly lesser) than the price at which SEZ units may be able to get from the developers as utilities and infrastructure that EOU or DTA units get will be public-funded whereas developers will look for returns on their private funding for infrastructure and utilities that they provide.

DTA units have unlimited flexibility to exploit growing domestic demand whereas EOU and SEZ units can have limited access to the domestic markets as they have to be net foreign exchange earners.

Flexibility could be crucial when global economy slows down.