Divisions over differential GST in SEZs

Differences have arisen between the ministries of finance and commerce over a proposal on application of the Goods and Services Tax (GST) on ‘non-processing areas of special economic zones (SEZs)’.

The Ministry of Commerce and Industry wishes to contest the idea of not allowing the benefit of zero-rating to these zones, proposed in the first discussion paper on GST, released on November 10 by the Empowered Committee of State Finance Ministers.

It is in the process of writing a letter to the finance ministry on the subject, sources told Business Standard. The commerce ministry says any supply to the tax-free zones from the Domestic Tariff Area (DTA) is, correctly, treated as export. Similarly, supplies from SEZs to DTAs have to be treated as imports. Doing so is the correct position under the law, by their reading

In other words, says the commerce ministry, SEZs must get uniform tax treatment, not split into zones for this purpose. “The GST Act cannot supersede the SEZ Act. These are contentious issues and would be taken up with the department concerned. The SEZ policy is completely transparent; there is nothing called a processing zone and a non-processing zone,” the source said.

However, Asim Dasgupta, chairman of the empowered committee and finance minister of West Bengal, had earlier said the government would not extend any tax benefit and incur loss of revenue is those areas within SEZs where manufacturing work is not conducted.

At present, SEZs are given tax exemptions in the form of duty-free import of goods from DTAs for development, operation and maintenance of SEZ units. Under Section 10AA of the Income Tax Act, SEZs are given 100 per cent tax exemption for the first five years, 50 per cent for the next five years and 50 per cent of the ploughed-back export profit for the next five years.

SEZs are also exempt from Minimum Alternate Tax under Section 115JB of the Income Tax Act. These are also exempt from central sales tax and service tax, state sales tax and other levies imposed by state governments.

“There is no problem as long as the tax benefits re available to the processing zones where the actual manufacturing takes place and the units are housed. Non-processing areas are non-bonded areas, which are not customs-bonded and house social infrastructure like schools, hospitals, malls, from where no transaction will take place,” PricewaterhouseCoopers Senior Manager Tapan Sangal said.

The government has so far approved 570 SEZs, of which 343 zones have been notified, while 101 are operational at present.