SEZs: The Gateway to Export Duty Exemption

[Somesh Jain]

The government often resorts to regulatory measures to safeguard domestic interest, foster economic growth, or address supply-demand imbalances. One such measure is the imposition of export duties on essential commodities. Notably, the Indian government has in recent past levied export duties on various products, including molasses, onions, and parboiled rice.

Levy of Export Duty under the Customs Act

Section 12 of the Customs Act, 1962 provides for levy of duties of customs on goods imported into, or exported from, India.  The term “export” is defined under Section 2(18) as “taking out of India to a place outside India. Section 2(27) defines “India” to include the territorial waters of India. Section 2 read with the Second Schedule of the Customs Tariff Act, 1975 provides for rates of Export Duty on goods exported out India.

A conjoint reading of above provisions makes it clear that export duty can be levied only on goods exported beyond the territorial waters of India.

Government’s view – Export duty is applicable on SEZ supplies by DTA units

Department of Commerce (SEZ) Section, Ministry of Commerce and Industry, Government of India issued a circular Bearing F.No. 6/2/2008-SEZ (pt), dated 30-6-2008, clarifying that supply of goods by the units in Domestic Tariff Areas, to the Special Economic Zones, would be permitted only after the payment of the prescribed amount of export duty.

The Revenue Department’s argument is that the definition of “export” under Section 2(m) of the SEZ Act includes supplying goods from DTA unit to SEZ unit. Extrapolating this definition of the word “export” to the Customs Act, the Revenue Department has built its case for levy of export duty on SEZ supply of goods by DTA units.

Definition of “export” in SEZ Act cannot be imported into the Customs Act for levy of Export Duty

The definition of the term in one statute does not afford a guide to the construction of the same term in another statute – Maheshwari Fish Seed Farm v. Tamil Nadu Electricity Board, AIR 2004 SC 2341.

Justice G.P. Singh in his treatise on "Principles of Statutory Interpretation" (Ninth Edition, 2004, at page 163) points out that "......it is hazardous to interpret a statute in accordance with a definition in another statute and more so when such statute is not dealing with any cognate subject or the statutes are not in pari materia."

Furthermore, unlike Section 2(zd) of the SEZ Act, whereunder all other words and expressions used and not defined in the SEZ Act but defined inter alia in the Customs Act, 1962 shall have the meaning respectively assigned to them in those Acts, the Customs Act 1962 does not contain a similar provision requiring the words and expressions used, and not defined in the Customs Act, to have the meaning assigned to them under the SEZ Act.

Moreover, the word ‘export’ has already been defined in Section 2(18) of the Customs Act. The said definition of ‘export’ is at variance with the definition of export under Section 2(m)(ii) of the SEZ Act. For attracting levy of customs duty under Section 12(1) of the Customs Act, 1962 it is the definition of the word ‘export’ under Section 2(18) of the Customs Act which would apply, and not the word ‘export’ as defined under Section 2(m)(ii) of the SEZ Act, 2005.

Why export duty is not leviable on supplies of goods from DTA unit to SEZ unit?

The provision for levy of export duty is under the Customs Act. The levy has been imposed on goods exported from India. Both the SEZ unit and the DTA unit are located within the territorial waters of India. Thus, Section 12 of the Customs Act 1962 (which is the charging section for levy of customs duty) is not attracted for supplies made by a DTA unit to a unit located within the Special Economic Zone.

Further, there is no charging section under the SEZ Act which levies export duty on supplies of goods from DTA unit to SEZ unit. This is opposed to erstwhile Section 76A of Chapter XA of Customs Act (repealed w.e.f. 11-5-2007) which specifically create a levy of export duty on any goods admitted to a special economic zone from the domestic tariff area at the rate applicable on goods when exported out of India.

The absence of export duty imposition on supplies from Domestic Tariff Area (DTA) units to Special Economic Zones (SEZs) is further emphasized by the existence of a distinct charging provision, Section 30 of the SEZ Act read with Rule 47 of the SEZ Rules which provides for imposition of customs duties on DTA supplies made by SEZ units.

Article 265 of the Constitution of India prohibits levy or collection of tax except by authority of law. The rule of construction of a charging section is that, before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used therein. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words he cannot be taxed at all. [COMMISSIONER OF WEALTH-TAX VERSUS ELLIS BRIDGE GYMKHANA AND OTHERS - 1997 (10) TMI 2 - SUPREME COURT].

Thus, in absence of any charging section, export duty cannot be levied on SEZ supplies by DTA units.

Several High Courts have held that there is no levy of export duty on SEZ supplies by DTA units on the similar lines [ADVAIT STEEL ROLLING MILLS PVT. LTD. VERSUS UNION OF INDIA - 2013 (8) TMI 33 - MADRAS HIGH COURT; TIRUPATI UDYOG LTD. VERSUS UNION OF INDIA - 2010 (7) TMI 768 - ANDHRA PRADESH HIGH COURT; ESSAR STEEL LTD. VERSUS UNION OF INDIA - 2009 (11) TMI 141 - GUJARAT HIGH COURT - SLP against the High Court decisions are pending before the Supreme Court].

Further, fifth proviso of Rule 27 of the SEZ Rules seeks to levy export duty on supplies made by DTA units to SEZ units of items which otherwise attract export duty. However, it is settled principle of law that tax cannot be imposed by delegated legislation. As per Article 265 of the Constitution, tax can be levied only by a law made by Parliament. In absence of any provision in the SEZ Act to levy export duty on such supplies by DTA units to SEZ units, the rule seeking to impose export duty will be ultra vires and unconstitutional.

Whether Export Duty is leviable on actual exports made by SEZ units out of India?

Section 26(1)(b) of the SEZ Act provides exemption from any duty of customs on goods exported from SEZ unit to any place outside India. The relevant extract of the said decision is as under:

“26. Exemptions, drawbacks and concessions to every Developer and entrepreneur.

(1) Subject to the provisions of sub-section (2), every Developer and the entrepreneur shall be entitled to the following exemptions, drawbacks and concessions, namely: -

…

(b) 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:”

The Andhra Pradesh High Court in the case of TIRUPATI UDYOG LTD. VERSUS UNION OF INDIA - 2010 (7) TMI 768 - ANDHRA PRADESH HIGH COURTalso observed that “but for the exemption under Section 26(1)(b) of the SEZ Act, goods exported by a unit in an SEZ to any [place] outside India would have been subjected to levy on customs duty under Section 12(1) of the Customs Act.”

Thus, in view of the exemption granted under Section 26(1)(b) of the SEZ Act, no export duty is payable on export of goods by SEZ units outside India.

Conclusion

In conclusion, there is a significant loophole in the legal framework regarding the imposition of export duties on supplies from Domestic Tariff Area (DTA) units to Special Economic Zones (SEZs) and further export of goods from SEZ units outside India. Thus, any exporter in India can legally avoid payment of export duty by routing it through SEZ units.

Despite various High court decisions consistently holding that there is no levy of export duty on SEZ supplies by DTA units, no amendments have been made in the SEZ Act.

Recent trends in imposition of export duty have shown that it is generally imposed on agricultural products and minerals/metals to reduce inflationary pressures rather than augmenting revenue of the Government.

That being said, however commendable the objective may be, if the levy is not explicit in the words of the statute, the goods cannot be subjected to duty.

Discussions to this article

[Anil Malhotra]

There is indeed too much ambiguity on export duty matter. What if the input raw material, which otherwise attracts export duty against exports outside India, is used to produce a value added product which is almost 7 times higher in value. Why export duty should be levied for input raw material when similar DTA units don’t pay any such duties and get additional advantage of earning export benefits which are otherwise SEZ units are not entitled for. Only becoz someone might misuse SEZ option to re-export otherwise restricted product, doesn't mean that the other units gets penalized who can rather earn 7 times more forex for the country by exporting the finished product. Incidentally such SEZ units end up increasing their cost of production as they are importing same raw material at higher costs ( incidentally at zero import duties ) and making exchequer loose foreign exchange as well. This is totally unjustified. Who says that India is progressing and making itself a manufacturing base when basics can’t be understood by the decision makers / bureaucrats who are qualified intellectuals running high offices .