WITH Budget preparations gaining momentum, the finance ministry has put its foot down on a series of concessions proposed for export promotion. As a result, the revenue department is heading for a standoff with the commerce & industry ministry over various issues including exemption from central sales tax (CST) and state-level value added tax (VAT) for special economic zones (SEZs), retention of Section 10 B of the Income Tax Act, replacement of the duty exemption pass book (DEPB) scheme and total exemption from service tax for all exports. While the proposal for CST exemption to SEZ goods has been referred to the law ministry, the empowered committee of state finance ministers has been asked to look into zero rating of VAT for supplies to SEZs.
While revival of Section 10 B ––which is set to expire next year –– is being studied by the Prime Minister’s Economic Advisory Council (EAC), another panel set up by the Prime Minister’s Office (PMO) is considering sops for hardware manufacturing. So many issues related to export promotion have got bogged down in ‘committee mania’ as revenue concerns have been cited by the finance ministry to reject these demands, most of them from the commerce & industry ministry.
On CST exemption to goods manufactured in SEZs, the commerce department had explained that imports are exempted from this levy. Since goods coming into the domestic market (technically described as domestic tariff area) from SEZs are considered imports, they should not be subject to CST. However, the finance ministry has not agreed to this contention and the ball is now in the law ministry’s court.
On zero rating of VAT supplies to SEZ units and developers, many states not allowing this concession. As the industry took up the issue with the commerce department, officials of the finance ministry pointed out that it had to be sorted out by the empowered committee of state finance ministers. Development commissioners of SEZs are now collecting details to present the case before the state finance ministers. Barring Gujarat, Tamil Nadu, Karnataka and Kerala, zero rating is not available to SEZ units, developers and co-developers now. Commerce department officials feel that the finance ministry is not taking active interest in getting the issue resolved by urging state governments to concede the industry’s demand.
One area where the commerce department has already conceded defeat is making the Centre responsible for exempting exporters from paying state input taxes. With the finance ministry ruling out the possibility of the Centre footing the bill for states, the government is working out a mechanism through which the state governments can compensate exporters. With the issue of state tax exemption hanging in balance, the plan to replace the popular DEPB scheme with the duty drawback scheme and the state tax exemption scheme has also been indefinitely postponed.