SEZ doors shut for trading units

NEW DELHI: The government has slammed the brakes on trading units seeking to enter the numerous special economic zones (SEZs) coming up across the country. While development commissioners of SEZs have been asked not to clear applications from trading units, senior officials of the finance ministry are in consultation with their counterparts in the commerce & industry ministry to debar trading units from availing income tax exemption available under Section 10 A of the Income Tax Act.

Development Commissioners of SEZs have been asked to keep trading units out, highly-placed government sources said. Communication to this effect has been sent to all development commissioners, the sources said. Each SEZ has a development commissioner who is responsible for all clearances.

The ban follows apprehensions that merchant exporters would relocate to SEZs to avail of the tax holiday available to SEZ units. The finance ministry feels that revenue loss will be substantial if exporters procure goods from the local market and then export it from SEZs — availing of all tax benefits without actually setting up any new manufacturing capacity.

The issue of ‘trading units’ was discussed at the recent meeting of the SEZ Board of Approval and it was decided that these units would not be allowed till a detailed policy was formulated on them.

“There was an apprehension that purely trading units in the DTA (domestic tariff area or local market) may seek to relocate to an SEZ for tax avoidance. In view of the concerns of revenue loss due to such activity being allowed in SEZs, the Board decided to instruct development commissioners not to allow trading units to be set up in SEZ until the issue was fully examined and guidelines were issued on this subject,” according to the minutes of the board meeting.

Representatives of finance as well as commerce & industries were present at the meeting.The ban on trading units will not cover companies carrying out imports purely for exports from SEZs. Neither would the decision have an impact on the free trade warehousing zones (FTWZs) proposed by the government, the sources said.

A large portion of India’s exports is handled by merchant exporters who procure goods manufactured by smaller units and export them after branding. In some cases, even branding is not involved as these firms book orders and get goods manufactured by small units. This is typical in the case of sectors like textiles, handicrafts and gift items.

Since the government wants to provide a thrust to manufacturing and infrastructure through SEZs, the mood is against trading companies finding a place in these zones. Under the SEZ Act, units located in these zones are eligible for full tax holiday for the first five years, 50% tax exemption for the next five and benefit on ploughed back profits for another five years.