India Re-Evaluates “Export” Terminology, SEZs May Be Affected

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Within the new Indian budget are provisions to reinterpret the term “export” in a move that may impact upon the nation’s Special Economic Zones (SEZs).  Hidden within the fine print of the budget is a provision that could withdraw rebate on factory tax on supplies to these zones. 

The new budget specifically addresses and redefines the term ‘export’ in the excise law provision that governs rebate on the levy to mean taking goods out of India. With the insertion of this specific definition, the benefit of rebate on excise duty appears to have been restricted to exports out of the country. While this is targeted at “round tripping” techniques, where goods are “exported” to SEZs and then reimported, foreign investors situated in India’s SEZs will need to pay attention to the interpretation of export in order to reclaim tax. 

 Excise duty is levied upon clearance of manufactured goods from the factory premises of the manufacturer. Manufactured goods, when exported out of India, can be cleared against bond without payment of excise duty. Alternatively, on clearance of manufactured goods for export, excise duty paid on clearance can be claimed as rebate subject to conditions.

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Since SEZs are deemed foreign territory, supplies made to SEZs are considered as exports as well. Therefore, the factories that export such goods have been able to claim back upon shipping to SEZs, even though the product has not officially left Indian soil. 

The new definition places a restriction that runs contrary to many SEZ Rules, as supplies to SEZs are also considered exports. The domestic supplies to SEZs enjoy both export benefits in terms of Foreign Trade Policy and duty drawback. 

Chris Devonshire-Ellis of Dezan Shira & Associates comments: “This interpretation is fair enough and follows the procedures adopted by countries such as China.  It is designed to prevent round tripping and the claiming of tax rebates from the Indian Exchequer that have not actually left the country. For too long Indian SEZs have been treated as a tax sop by domestic manufacturers who had no intention to truly export. This move raises the integrity of Indian SEZs and shows the government is serious about improving transparency and widening its tax base overall. 

Although certain ‘false export’ manufacturers will complain, this reinterpretation of what ‘export’ actually means is to be welcomed. Foreign investors in such zones will need to clarify with customs on the new documentation procedures to apply for tax rebates when the product has actually been shipped out of India.”

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