JULY 08, 2008

A Netizen's Edit

THE million dollar question (definitely that expensive as the export duties payable by units is running into millions) doing rounds in the circles of the steel manufactures all over India is: “Is Export duty payable by DTA units for supplies to SEZ and if payable; by whom? ” A variety of answers have been given to the above question, by many legal luminaries, which have been published in TIOL as well as other taxation journals, which only complicated a simple issue.

In this piece, I would like to discuss and put to rest all controversies surrounding the issue. Immediately on issuance of the Notification 66/2008-Cus dated 10.5.2008 specifying the effective rates of export duty on the steel products, Basmati Rice, the question of payment of export duty on supplies to Developers of SEZ's / Units in SEZ arose. The Commissioner of Customs & Central Excise, Hyderabad III Commissionerate, Hyderabad, on the query raised by a steel manufacturer, issued a clarification to the effect that

“In terms of Section 26 of SEZ Act, no customs duty is leviable. This being a statutory provision will take precedence over Notification No.66/2008-Cus. In any case in the Notification No.66/08-Cus. Phrase used is ‘out of India' where as in Section 53 of SEZ Act, phrase and words used are ‘out side the customs territory of India'. In other words SEZ is not ‘out of India'. Hence, Notification No.66/2008-Cus is inapplicable. No duty is therefore leviable in the present case”.

Before analyzing the clarification of the Commissioner, I would like to present relevant provisions of the Customs Act, 1962 and the Special Economic Zones Act, 2005 and also dates on which export duties was prescribed for non-alloy steel bars and rods (steel products) for the purpose of easy understanding.

The Union Finance Minister has proposed (during the course of budget discussions on 30.04.2008 for Budget 2008-09 ) addition of some more goods in Second Schedule to the Customs Tariff Act, 1975 for the purpose of charging of export duty and they interalia include

•  Bars and rods, hot-rolled, in irregularly wound coils, of iron or non-alloy steel

•  Other bars and rods of iron or non-alloy steel, not further worked than forged, hot-rolled, hot-drawn or hot-extruded, but including those twisted after rolling, etc.

The President of India has given assent to the Finance Bill on 10.05.2008 and hence the same are applicable from 10.05.2008. However, the Government of India (CBEC), vide Notification No.66/2008-Cus dated 10.05.2008 prescribed the effective rates for the above said goods and the same were 10 % adv for above said two products. The above notification has been amended vide Notification No.77/2008-Cus dated 13.06.2008 and after issuance of this notification the effective rate of export duties are 15% adv. for above referred two products.

Section 2 (18) of the Customs Act, 1962 defines “Export' as ‘with its grammatical variations and cognate expressions, means taking out of India to a place outside India ”.

Section 2 (m) (ii) of the SEZ Act, 2005, “Export” reads as ‘Supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer”;

Section 2 (o) of the SEZ Act, 2005, “Import” means –

•  bringing goods or services, in a Special Economic Zone, by a Unit or Developer from a place outside India by land, sea or air or by any other mode, whether physical or otherwise; or

•  receiving goods, or services by a Unit or Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone .

In the light of the definitions of export and import in the SEZ Act, 2005 and definition of Export in the Customs Act, 1962 the goods supplied by DTA units to SEZ amounts to export and as far as the Developers of SEZ / SEZ units, the goods procured by them does not amount to import. Further, the CBEC, New Delhi, vide its Circular No.29/2006-Cus dated 27.12.2006 [para 3 (a)] has clarified that in respect of supply of goods from DTA to a SEZ unit or a SEZ Developer has been defined to constitute ‘Export'.

Section 53 (1) of the SEZ Act, 2005, reads as “A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory out side the customs territory of India for the purpose of undertaking the authorized operations”.

It is imperative to mention here that as per the provisions of Section 51 of the SEZ Act, 2005, that the provisions of SEZ Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than SEZ Act.

Section 26 (1) of the SEZ Act, 2005, reads as ‘ Exemptions, drawbacks and concessions to every Developer and entrepreneur : – (1) subject to provisions of sub-section (2), every Developer and the entrepreneur shall be entitled to the following exemptions, drawbacks and concessions, namely:-

•  exemption from any duty of customs, under the Customs act, 1962 or the customs tariff act, 1975 or any other law for the time being in force, on goods imported into, or services provided in, a special economic zone or a unit, to carry on the authorized operations by the developer or entrepreneur;

•  exemption from any duty of customs, under the customs act, 1962 or the customs tariff act, 1975 or any other law for the time being in force, on goods exported from, or services provided, from a special economic zone or from a unit, to any place outside India;

•  exemption from any duty of excise, under the Central Excise Act, 1944 or central excise tariff act, 1985 or any other law for the time being in force, on goods brought from Domestic tariff area to a special economic zone or unit, to carry on the authorized operations by the developer or entrepreneur;

•  drawback or such other benefits as may be admissible from time to time on goods brought or services provided from the domestic tariff area into a special economic zone or unit or services provided in a special economic zone or unit by the service providers located outside India to carry on the authorized operations by the developer or entrepreneur;

•  ….

•  ….

•  ….

(2) The Central Government may prescribe, the manner in which, and, the terms and conditions subject to which, the exemptions, concessions, drawback or other benefits shall be granted to the developer or entrepreneur under sub-section (1).

Section 26 (1) (a) of the SEZ, Act, 2005 specifies that the SEZ Units or Developers are allowed to import goods without payment of duty from a place outside India by land, sea or air or by any other mode, whether physical or otherwise or from a Unit or Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone only. Section 26 (1) (b) of the SEZ, Act, 2005 specifies that the SEZ Units or Developers are allowed to export the goods from a Special Economic Zone or from a Unit, to any place outside India without payment of any duty of customs. Section 26 (1) (c) of the SEZ, Act, 2005 specifies that the SEZ Units or Developers are allowed to procure goods from Domestic Tariff Area to a Special Economic Zone or Unit to carry on the authorized operations by the Developer or entrepreneur without payment of any duty of excise under the Central Excise Tariff Act, 1944 or the Central Excise Tariff Act. Section 26 (1) (d) of the SEZ, Act, 2005 specifies that the SEZ Units or Developers are entitled for benefits such as drawback on goods brought from the DTA into a Special Economic Zone or Unit to carry on the authorized operations by the Developer or entrepreneur.

It is clear that the Section 26 specifies about the exemption available to SEZ units from payment of i) any duty of Customs on import of the goods from a place out side India, which is otherwise leviable under Section 12 of the Customs Act, 1962 read with Schedule I of the Customs Tariff Act, 1975 and ii) any Duty of Excise on the goods procured from DTA units. Section 26 of SEZ Act, 2005 does not cover exemption from payment of Export duty payable by the persons who are supplying the goods to a unit in SEZ/ developers of SEZ. It is also to mention that since the export i.e. supply of goods to SEZ units would be carried out by DTA unit and thereby they are required to discharge the export duty liability.

Assuming that the clarification given by the Commissioner as correct (“Notification No. 66/2008-Cus is inapplicable”), then the DTAs have to pay Export Duty on their supplies to developers of SEZs / units in SEZs at the Tariff Rates as prescribed in the Second Schedule to the Customs Tariff Act, 1975 (20% Adv for steel products).

In the light of the above discussion, it is clear that in case of supply of steel products by the DTA units to the Developers of SEZs / units in SEZ attracts export duty, which is leviable under second schedule to the Customs Tariff Act, 1975 and on which no exemption has been provided either in the SEZ Act, 2005 or in the Customs Act, 1962 / Customs Tariff Act, 1975. Hence the DTA units are liable to export duty with effect from 10.05.2008.

Now the question arises as to who is to pay the export duty. The CBEC vide its Circular No.29/2006-Cus dated 27.12.2006, has already clarified that the supplies made by DTA to developers of SEZs / units in SEZ constitute ‘export' and the exporters are liable to pay export duty in terms of Section 12 of the Customs Act, 1962 at the time of filing Bill of export (As per Rule 30 of the SEZ Rules 2006) with the Authorised officer of the respective SEZ. Hence any DTA supplier making supply of steel products to Developers of SEZ/ units in SEZ has to pay the export duty as discussed above.