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

NEW SEZ RULES MAKE RELOCATION HARD

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 to SEZs.

The amendments seek to introduce conditions to qualify for the tax benefits. Commerce ministry officials said that the amendments would address the finance ministry's apprehensions on potential revenue leakage due to relocation.

As per the amended rules, companies operating in SEZs will have to make fresh investments in plant and machinery. Those that plan 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. This means only those companies that import goods to reexport can claim an income-tax rebate on trading activities. Trading by companies that source products from domestic tariff areas (any local market outside the SEZ) for export will not qualify for the tax benefits. The amendment notifications come ahead of the crucial meet of the empowered group of ministers on SEZs, which will review the cap of 150 placed on the number of approvals. The Board of Approval for SEZs has already approved 150 SEZ applications while there are 200 more in the pipeline.

According to Export Promotion Council for EOUs & SEZ units director-general LB Singhal, the SEZ cap has to go. “The 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.