SEZ export obligation to attract tighter vigilance

NEW DELHI: The introduction of export obligation for units operating within SEZs equivalent to the purchases made by them from the domestic tariff area (DTA) will call for more paperwork for units and stricter vigilance on the part of the revenue department to ensure compliance.

Earlier, SEZ units were supposed to be only net foreign exchange earners. The additional obligation, introduced by the empowered group of ministers on SEZs last week, will now also require units which were earlier not obligated to export, to compulsorily undertake exports and maintain two balance sheets to account for their sales in the domestic market and the international market.

A number of SEZs, especially those in the IT and IT-enabled services sector like the Nokia SEZ in Sriperembudur, have no intentions to export till date.

Going by the earlier rules, Nokia’s production unit had no obligation to export as it was not sourcing anything from the international market. However, under the new rules, it will compulsorily have to export products at least equivalent to the value of the inputs sourced by the unit from the domestic market or the DTA. Speaking to ET, official sources clarified that now all SEZ units will have to separately show their sales in the domestic market and the international market.

The increased export obligation will also require the revenue department to tighten vigilance. Since SEZ units are to get tax exemptions on the profits made from exports and not from their sales in the DTA, there are chances that units show a more robust balance sheet with regard to exports and show a lean balance sheet for sales in DTA to claim larger exemptions.

To prevent any misuse, transfer pricing (TP) provisions would come handy here for the revenue department, officials said.

The principle ensures that prices in the transaction are equivalent to what they would have been, had the parties involved in the transaction not been related to each other.

The department is already strengthening its TP cell to deal with large number of SEZs.

Interestingly, China has also made effective use of TP norms in a comprehensive way in SEZs in the country.