The special economic zone (SEZ) policy has come under the scanner with the Comptroller &Auditor General (CAG), the government’s auditor, detecting cases where units in these tax free zones selling a majority of their produce within the country rather than actual exports.
In a report tabled in Parliament on Tuesday, the CAG said that many SEZs, including a cellular telephone manufacturing company, have sold their produce within the country, referred to as the domestic tariff area (DTA), without paying the taxes.
In addition, many of these zones have resorted to “deemed exports” to shown foreign exchange earnings.
"Deemed Exports" refers to those transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange.
“There was no restriction on ‘deemed exports’ being reckoned as exports enabling the units to attain positive net foreign exchange earning (NFE), predominantly through deemed exports rather than actual exports,” the report said.
The duty foregone by the government on the SEZ scheme during 2000-01 to 2005-06 was Rs 8,842 crore, it said, adding for 2006-07 duty foregone would be Rs 2,146 crore as per budget estimates. As a result, 22 SEZ units had achieved the required positive NFE, although actual export earnings were only 28 per cent and remaining came from domestic sales.
The CAG report also said the units under the domestic tariff area (DTA) were at disadvantage as compared with SEZ units. The CAG recommended the government introduce special provisions to set up a level playing field.
The SEZ scheme relies mainly on self-certification and does not require the quarterly or annual performance reports supported by other documents such as annual accounts and income tax returns.
“This facilitated few units provide incorrect and inconsistent data in their quarterly performance reports. The NFEs derive on the basis on this inconsistent data cannot be relied upon. The government needs to address this concern,” it said.