INDIA BUSINESS WORLD - JULY 2006
THE MONTH THAT WAS...

SEZ DOORS SHUT ON TRADING UNITS

THE government has slammed the brakes on trading units seeking to enter the numerous special economic zones (SEZ) 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 incometax exemption available under Section 10A of the Income-Tax Act.

Development commissioners of SEZs have been asked to keep trading units out, highly-placed government sources said. Communication to the 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 would be substantial if exporters procure goods from the local market and then export them from SEZs –– availing all tax benefits without actually setting up a 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 the units would not be allowed till a detailed policy is formulated on them.

“There was an apprehension that purely trading units in the domestic tariff area (DTA, 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 the 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 the subject,” according to the minutes of the board meeting.

Representatives of the finance as well as the commerce & industries ministries were present at the meeting.

The ban on trading units will not cover companies carrying out imports purely for exports from SEZs.