JULY 10, 2008

By A Netizen

NOT a happy news for the steel units clearing goods to SEZs, the Ministry of Commerce has at last  clarified, vide letter dt. 30/063/2008, that clearances of steel products to SEZ attract export duty.

A quick recap of events:

The Government has imposed export duty on certain steel products by declaring them under Second Schedule of Customs Tariff Act during the enactment of Finance Bill, 2008. The government vide Notification No. 66/2008-Cus dt. 10/05/2008, has brought into effect the levy of export duty on certain iron and steel products @ 10%.   This notification has been amended vide Notification No. 77/2008-Cus dt. 13/06/2008 by substituting ‘Nil” rate against some of the iron steel products ( Sl. No. 7, 8 & 9 )  mentioned in the Notification No. 66/08.  At the same time it has also enhanced the rate of export duty of some of the products like hot rolled Bars and rods of iron or steel from 10% to 15%. As there was no clarity on the issue whether the clearances made to SEZ units would attract export duty or not, the issue was agitated all over the country seeking a clarification from the Ministry of Finance. As the SEZs are pet babies of MOC, it appears that the Ministry of Commerce has taken up the issue with the Ministry of Finance to consider exempting the clearances made to SEZ from the purview of export duty, and hoping for a positive reply from MOF. However, the Ministry of Commerce has to meekly accept the clarification given by DOR stating that export duty is applicable to clearances made to SEZs from the date of Notification No. 66/08.

A quick reading of the letter dt. 30/06/2008 would convey that the decision has been arrived keeping revenue aspect in the mind, as the letter does not discuss anything about the legality of the issue and would not justify keeping the issue on fire for more than a month by DOR just to say that the clearances to SEZs attract export duty, without any discussion.

Though it is not known as to which of the provisions of the SEZ Act/Customs Act prompted the MOF/DOR to come to conclusion that clearances to SEZ also attracts export duty, a close examination of some of the provision of the Customs Act/SEZ Act would leave an element of doubt regarding the  correctness of the clarification given.

It should be understood that Export duty is levied and collected as per the provision of Section 12 of Customs Act (Not under SEZ Act) which reads as follows:

SECTION 12.. Dutiable goods – (1) Except as otherwise provided in this Act, or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975 (51 of 1975 , or any other law for the time being in force, on goods imported into, or exported from, India.
 
From the above it is clear that export duty can only be levied on the goods “exported from India”.

This position of law is further substantiated by the definition of “export” , “ export goods” and “ India” given under Section 2 of the Customs Act. The relevant terms are defined in the Customs Act as follows:

 “export”, with its grammatical variations and cognate expressions, means taking out of India to a place outside India;

“Export goods” means any goods which are to be taken out of India to a place outside India;

“India” includes the territorial waters of India;

“Indian customs waters” means the waters extending into the sea up to the limit of contiguous zone of India under section 5 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976 and includes any bay, gulf, harbour, creek or tidal river;

The above definitions given in the Customs Act makes it very clear that export duty can only be levied if the goods are taken out of territorial waters of India. The Notification No. 66/08 also contain the words “ exported out of India” , which also  means that the Second Schedule of Customs Tariff Act ( by which export duty is levied )  seeks to  levy of export duty only on the goods exported out of India.

The definition given for “export” in the SEZ Act is not much of relevance so far as the levy of export duty is concerned. Though the SEZ Act defines any clearances from DTA to SEZ Unit as constituting export, this is done only for the limited purpose of conferring export benefits to clearances made to SEZs by DTA units and as such this definition of export given in the SEZ Act will not have any effect for the purpose of levy of export duty, by virtue of Section 12 of Customs Act and the term “export “ defined under the Customs Act. In a nutshell, export duty can only be levied if the goods are exported from India not withstanding the definition for “export” appearing in SEZ Act.

Is SEZ out of India”?

It is being strongly advocated that SEZ constitute foreign territories by virtue of Section 53 of SEZ Act. However, the Section 53 of SEZ Act recognizes SEZ as the territory outside the Customs territory of India for limited purpose. This will not override as to what constitute “India” as per the definition given in the Customs Act. This point is very clear from the wordings of Section 53 of SEZ Act, which reads as follows:

Section 53. A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations.

(2) A Special Economic Zone shall, with effect from such date as Central Government may notify, be deemed to be a port, inland container depot, land station and land customs stations, as the case may be, under section 7 of the Customs Act, 1962

Moreover , the word “India” has not been defined in the SEZ Act, hence the definition given in the Customs Act for the word “India” will hold good even for the purpose of  SEZ Act also, as per the Section 2 (zd) of the SEZ Act( which reads as follows) :

(zd) all other words and expressions used and not defined in this Act but defined in the Central Excise Act, 1944, the Industries (Development and Regulation) Act, 1951, the Income–tax Act, 1961, the Customs Act, 1962 and the Foreign Trade ( Development and Regulation) Act, 1992 shall have the meanings respectively assigned to them in those Acts.

In terms of the above provisions, it is only the export made outside the territorial waters would constitute as “export” for the purpose of Section 12 of Customs Act and clearances to SEZ cannot be construed as export out of India.

Further, levy of export duty on clearances to SEZ units would defeat the very purpose of presence of Section 7 of SEZ Act, which reads as below:

Section 7: Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by, -

(i) a Unit in a Special Economic Zone; or

(ii) a Developer;

shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule.

The above discussed provisions and also comprehensive understanding of other provisions of SEZ Act and SEZ Rules will make it clear that the SEZ Act does not seek to covey the meaning that SEZs are outside the Customs Territory of India  and the provisions of SEZ Act does not in any way  override the provisions of Customs Act so far as what constitute the meaning of words “ exported out of India”

Thus the issue is not as simple as it is made out to be and the clarification given by MOC is open for challenge in the courts of law and ultimately it is the consultants who benefit most.

A letter signed on 30th June, which seeks to clarify such an important issue agitated all over the county has taken 10 days to reach the field formations or is it a case of signing with back date. Whatever may be!

Also see our Previous Edits on this Issue

1) Is Export duty payable by DTA units for supplies to SEZs? If at all payable who is liable to pay?

2) Export duty on SEZ clearances: Dear FM, Please take a decision quickly