SEZ hurdle: Ministries disagree on 'manufacturing'

Differences between the finance and commerce ministries on the issue of a common definition of "manufacturing" under excise, income tax and export rules are coming in the way of clearance of the Special Economic Zone Bill by the Cabinet.

Both the ministries have now set up a four-member committee comprising officials from the revenue department and the directorate-general of foreign trade to examine the issue.

The commerce and industry ministry wants the finance ministry to recognise the definition of manufacturing as given in the foreign trade policy for purposes of exports.

"There have been cases where exporters are being harassed by excise or income tax officials on grounds that their activity does not tantamount to manufacture. The definition of manufacturing as given in the foreign trade policy should be valid for exports even under the excise and income tax rules," a senior commerce ministry official told Business Standard.

The finance ministry, on the other hand, sees the definition of manufacturing in the policy as too liberal. It is of the view that the definition should be more restrictive.

North Block is also keen to do away with the concept of "duty foregone" in terms of sales by SEZs to units in the domestic tariff area (DTA).

At present, a SEZ unit buying inputs from the DTA does not have to pay any excise duty. Therefore, the amount of the excise duty not paid by the SEZ on purchase from the DTA is 'duty foregone'.

The finance ministry has suggested that the 'duty foregone' should be paid as countervailing duty, along with Customs duty, at the time of a sale by a SEZ unit to a DTA unit.

The commerce ministry has, however, suggested that SEZ units be asked to pay only part of the 'duty foregone'. The ministry has suggested 50 per cent of the total Customs duty and 'duty forgone' be paid for all sales from SEZs to DTA.

The SEZ Bill, proposed by the ministry of commerce and industry, had asked for a 100 per cent income tax exemption for SEZ units for the first 5 years of operation, 50 per cent for the next 5 years and 50 per cent exemption on profits reinvested for the next 10 years.

The finance ministry, however, wants to retain the present provision of a10-year exemption under which 100 per cent exemption is available for 5 years, 50 per cent for the next two years and 50 per cent exemption on profits reinvested for the next 3 years.

The Finance Bill 2005-06 has already proposed a sunset clause of 2009 for SEZ units.