Govt tightens SEZ rules, blocks short cut to sops

NEW DELHI: Existing units planning to relocate to special economic zones (SEZs) to take advantage of tax sops are in for some disappointment. The commerce ministry has introduced amendments in the SEZ rules to check diversion of exports and production activity from domestic area to SEZs.

The amendments seek to introduce conditions to qualify for the tax benefits. Commerce ministry officials told ET that the changes will take care of the finance ministry’s apprehensions of potential revenue leakage due to relocation.

As per the new rules, companies operating in SEZs will have to make fresh investments on plant and machinery. Companies planning to install used plant or machinery will run the risk of being disqualified, sources said.

The other amendment relates to the definition of trading activities. The commerce ministry has now clarified that trading shall only mean import for the purpose of re-export. Put simply, only such companies who import goods to re-export can claim such trading activities for an income tax rebate.

Trading by companies who source products from domestic tariff area (any domestic market outside the SEZ) for export will not qualify for the tax benefits.

The amendment notifications come ahead of the crucial empowered group of ministers meeting on SEZs. The meet will review the cap of 150 placed on the number of approvals. There are 200 more in the pipeline. LB Singhal, director general of the Export Promotion Council for EOUs & SEZ units, said the cap on the number of SEZs has to go.

“The basic idea behind SEZs is to attract investments, create infrastructure and employment and generate economic activity. There is no logic behind putting a cap on the number,” he said. With the commerce ministry taking care of the revenue leakage possibilities, the EGoM should remove the ceiling on the number of approvals, he added.