Operationalisation of the Provision of Chapter X A of the Customs Act, 1962- Issuance of SEZ Rules and Regulations- Reg - Customs - 068/03

Circular No. 68/2003-Customs 30th July, 2003 F. No. 314/24/2001-FTT Government of India Ministry of Finance Department of Revenue Central Board of Excise Customs Sub: Operationalisation of the Provision of Chapter X A of the Customs Act, 1962- Issuance of SEZ Rules and Regulations- Reg I am directed to invite your attention to section 126 of the Finance Act, 2002 (20 of 2002) under which a special Chapter, i.e Chapter X A, was inserted in the Customs Act,1962, dealing exclusively with the Special Economic Zones. It was provided in the said section that the provision of this Chapter would come into effect from a date to be notified by the Government by notification in the Official Gazette. Sections of the said Chapter provided for framing of Rules Regulations also. 2. It has been decided to bring Chapter XA into force with effect from 15 th August, 2003 , vide notification No. 43 /2003-Customs (N.T.) dated 22-7-2003. 3. Similarly, vide section 133 of the Finance Act, 2002, an amendment was made in the Central Excise Act, 1944, so as to make the provisions of the Central Excise Act, 1944, inapplicable to goods manufactured or produced within the Special Economic Zones. This provision was also to come into force from a date to be notified by the Government. 4. It has been decided to bring the amendment in the Central Excise Act, 1944, as proposed under section 133 of the Finance Act, 2002, into force also with effect from 15 th August, 2003 vide notification No. 58/2003-Central Excise (N.T), dated 22-7-2003. 5. As envisaged in the Chapter XA of the Customs Act, 1962, the Special Economic Zone Rules, 2003 and Special Economic Zone (Customs Procedure) Regulations, 2003, have also been notified. (Ref: notification Nos. 52/2003-Customs (NT) and 53/2003-Customs (NT), both dated 22-7-2003). These SEZ Rules and Regulations will also come into force with effect from 15 th August, 2003. 6. The new chapter XA in the Customs Act, 1962 on Special Economic Zone, alongwith SEZ Rules and Regulations, envisage a major departure from the existing concept and functioning of Special Economic Zones. Under the new dispensation, Special Economic Zones will be considered as foreign territory for purposes of duties taxes. In other words, supplies from DTA units to SEZ units will be considered as exports by the DTA units supplies to DTA units from SEZ units will be considered as imports by the DTA units. The supplies to and from SEZ units will be governed by the provisions of the Customs Act, 1962 and not by the provisions of the Central Excise Act, 1944. The duty on DTA clearance of goods by SEZ units shall be levied under the provisions section 12 of the Customs Act, 1962 and Customs Tariff Act, as are levied in case of physical import of goods. This change in concept has necessitated framing of new procedures for functioning of SEZs, which are slightly different from the present system. This is why provisions of Chapter XA, SEZ Rules and SEZ Regulations are proposed to be made effective from 15th August, 2003 so as to give sufficient time to the field formations as well as SEZ units to familiarize themselves with the new provisions and by the time, the new SEZ Rules and Regulation come into force, trade as well as departmental officers are fully acquainted with the new provisions. 7. During this intervening time, you are requested to kindly go through the new provisions, get feedback from the trade and industry and inform the Board immediately of any implementation or interpretation problem. 8. The salient features of Chapter XA of the Customs Act, 1962 are as under :- (i) As per section 76 A of the Customs Act, 1962, the Central Government may, by notification in the Official Gazette, specify special economic zonse comprising specially delineated areas where any goods admitted will be regarded, in so far as duties of Customs are concerned, as being outside the customs territory of India. (ii) As per section 76 E of the Customs Act, 1962, any goods admitted into Special Economic Zone will be exempt from duties of Customs except export duties or export cess if any. Therefore, there will not be any requirement of exemption notification to allow duty free import of goods or procurement of goods from domestic tariff area by units in SEZ or by the developer of SEZ, as the exemption is allowed in the Act itself. (iii) Under the new dispensation, Special Economic Zones will be considered as foreign territory for purposes of duties taxes. In other words, supplies from DTA units to SEZ units will be considered as exports by the DTA units supplies to DTA units from SEZ units will be considered as imports by the DTA units. 9. The salient features of SEZ Rules, 2003, are as under:- (i) The SEZ should have clearly demarcated processing area and non-processing area. Units will be allowed to be set up in the processing area of SEZ only and that too for the purpose of carrying out authorised operations; (ii) Motor vehicles for personal use or goods for consumption by the workers, staff and officials of the SEZ unit / SEZ developer can not be admitted into the SEZ without payment of duty. [There will be no restriction of movement of vehicle in out of the SEZ for use by the units or their employees] (iii) The goods shall be allowed entry in the SEZ only for the purpose of carrying out “authorised operations” in the zone, which also includes development, operation and maintenance of SEZ and for providing public utility in the zone; (iv) The SEZ unit or Developer shall execute a multipurpose bond ( Form-I for the unit and Form–II for the developer) with the Customs authorities in the zone alongwith surety or security before starting duty free procurement or import of goods in the zone. It also envisages that a Committee under the jurisdictional Commissioner of Customs shall be constituted to allow duty free import /procurement for the purpose of development, operation and maintenance of the zone and to monitor the progress of such development. (v) The SEZ units shall be allowed to remove goods temporarily out of the zone without payment of duty for the purpose of repair, testing etc. (vi) Laptop Computer and video projection system for use by authorised employee of SEZ unit shall also be allowed to be taken out of zone temporarily without payment of duty. (vii) SEZ rules also provide for transfer of manufactured goods or capital goods from a SEZ unit to EOU/ STP/ EHTP/ other SEZ unit in the same zone or in other zone without payment of duty. (viii) The unit /developer shall also be required to maintain accounts for import, domestic procurement, consumption, utilisation of goods, inflow of all foreign exchange by way of exports and other receipts and out flow of all foreign exchange etc. The unit engaged in both trading and manufacturing activities shall be required to maintain records of accounts, separately, for trading and manufacturing operations. All units shall be required to submit quarterly returns to the jurisdictional Assistant Commissioner or Deputy Commissioner of Customs; (ix) SEZ Rules also provides that goods admitted into the SEZ unit shall be utilized or re exported or cleared into DTA on payment of duty within a period of five years from the date of admission, failing which the unit shall be liable to pay duty and interest; (x) The performance of the SEZ unit shall be monitored by the Commissioner of Customs having jurisdiction over the zone; (xi) It has been also provided in the rules that in case of closure of SEZ, the developer shall be required to pay duty on goods imported or procured duty free along with interest, however depreciation would be allowed on used machinery. In case of SEZ unit, the unit shall be required to pay duty on un-utilised raw materials/ manufactured goods/ semi-finished goods/capital goods at the time of closure of the zone. The depreciation shall be allowed at the rate of twenty percent or part there of, of the original assessable value in respect of computer and computer peripherals and ten percent, in case of other capital goods, on a straight line method. The depreciation upto hundred percent may be allowed. However duty would be payable on the transaction value or the depreciated value whichever is higher. 10. The SEZ Regulations, broadly, envisages all procedural aspects that are to be followed by SEZ unit in its day-to-day operations. The procedure incorporated in the regulation covers areas of import, export, inter-unit transfer, DTA procurement, clearance of goods in DTA, valuation of goods in DTA, temporary removal of goods in DTA, sub-contracting of production or production process in DTA or abroad, destruction of goods etc. Further, the requirement of procurement certificate, CT-3 certificate, Transit Permit and AR- 3A has been done away. As supplies of goods made by DTA unit to the SEZ unit or Developer for the purpose of carrying out authorized operation shall be treated as export for the DTA units and such supplies shall be eligible for DEPB or Draw back or any other exports benefits, as the case may be, utmost care may be taken to ensure that special economic zones do not become a dumping ground for dumping over-invoiced goods for the purpose of claiming higher DEPB or drawback. Before allowing admission of such goods inside the zone, nexus of the goods with the approved activity of the unit or necessity of such goods in case of developer may be examined and the bonafide requirement in terms of quantity may be ascertained. It may also be noted that all Circulars / instructions issued from time to time in respect of various export promotion schemes such as drawback or DEPB etc. shall also apply mutatis mutandis to goods being supplied to SEZ if the goods are being exported under the export promotion Schemes. In case the goods supplied by DTA units to SEZ are cleared back to DTA in the same form or without substantial processing, the same shall be treated as re-imported goods and shall be subject to all conditions and procedure as applicable to normal re-import of goods. 11. Hitherto, Special Economic Zone Scheme was operating under Central Excise Act, 1944, (since SEZ unit was considered as a manufacturing unit in India) and to implement the scheme, the following notifications had been issued, namely:- (i) No. 137/2000-Customs, dated 19-10-2000 providing for duty free import of goods by Special Economic Zone unit; (ii) No. 52/2000-Central Excise, dated 19-10-2000 providing for duty free procurement of goods by SEZ units from domestic units; (iii) No. 26/2003-Central Excise dated 31-3-2003 exempting goods produced or manufactured by a SEZ unit and allowed to be sold in India, from SAD [Special Additional Duty]. (iv) No.27/2003-Central Excise, dated 31-3-2003 fully exempting castor oil cake falling under heading No. 23.01, when manufactured from indigenous castor oil seeds on indigenous plant and machinery by a unit in special economic zone; (v) No.33/2003-Central Excise, dated 4-4-2003 providing for clearance of goods produced or manufactured by SEZ units to an Advance license holder or DFRC holder . (vi) No. 82/2002-Customs dated 13-8-2002 and 39/ 2003-Central Excise, dated 13-8-2002 allowing SEZ developer to import /procure goods duty free for the purpose of development, operation and maintenance of the Zone; 12. Under the new dispensation, supplies from DTA units to SEZ units will be considered as exports by the DTA units supplies to DTA units from SEZ units will be considered as imports by the DTA units. The supplies to and from SEZ units will be governed by the provisions of the Customs Act, 1962, and not by the provisions of the Central Excise Act, 1944. In view of this, the above stated notifications have been rescinded (Ref: notification Nos. 115/2003-Customs, dated 22-7-2003 and 59/2003-Central Excise, dated 22-7-2003). However, to continue exemption to castor oil cake as mentioned above and the exemption from payment of Special Additional Duty (SAD) on goods brought to any other place in India as referred above, new notifications have been issued under section 25(1) of the Customs Act, 1962 (Ref: notifications Nos. 113/2003-Customs and 114/2003-Customs, both dated 22-7-2003) 13. As per section 76 A of the Customs Act, 1962, the Central Government may, by notification in the Official Gazette, specify special economic zone comprising specially delineated areas where any goods admitted will be regarded, in so far as duties of Customs are concerned, as being outside the customs territory of India. Presently there are eight Special Economic Zones, which are in existence. As provisions of Chapter X A are being operationalised, therefore, notifications (non-tariff) have been issued under section 76 A to specify Noida SEZ, Surat SEZ, Kandla SEZ, SEEPZ SEZ, Cochin SEZ, FALTA SEZ, Chennai SEZ and Visakhapatnam SEZ as Special Economic Zones (Ref: notifications Nos. 44/2003-Customs (NT) to 51/2003-Customs (NT), all dated 22-7-2003). 14. Since under the new dispensation, the goods supplied by DTA manufacturer to SEZ unit or Developer is considered as export, a notification No.58/2003-Central Excise, dated 22-7-2003 exempting goods manufactured or produced by domestic tariff area unit, when supplied to Special Economic zone unit, have been issued incorporating procedural safeguards to protect interest of revenue so that the DTA unit could supply goods to SEZ unit without payment of duty. 15. In case of new zones to be approved in future, it is envisaged that once the zone is approved as special economic zone by the Board of Approval in the Ministry of Commerce, a notification shall be issued by this Department under section 76 A of the Customs Act, providing details such as Khasra number etc and after issuance of such notification, the zone shall be declared as Customs Area under section 8 of the Customs Act, 1962 by the jurisdictional Commissioner of Customs or the Commissioner of Customs Central Excise, as the case may be. Once the said formalities are complete, the developer as well as unit in the special economic zone shall be eligible for duty free import or procurement from domestic tariff area. 16. In case of new zones likely to be set up in near future, in the beginning at the development stage of the zone, there will not be any infrastructure facilities in the special economic zone for the Customs staff to carry out their duty and assess Bill of Entry / Bill of Export. In such cases, the developer of the SEZ or DTA supplier intending to supply goods to SEZ developer shall file Bill of Export in the nearest Central Excise Division/ Custom Commissionerate, as the jurisdictional Commissioner of Customs or Commissioner of Customs Central Excise, may specify, and all monitoring regarding SEZ shall be done by the Customs /Central Excise staff nominated for the purpose. Once an Assistant Commissioner or Deputy Commissioner of Customs with attendant staff is specifically posted for the zone , all further documents will be filed before him. It is imperative for the SEZ developer to create infra-structural facilities for Customs staff at the earliest so that all Customs formalities could be done in the zone itself. Till such infrastructural facilities are created in the zone itself, the SEZ units shall be allowed to import / procure construction materials only, but the developer can import any item required for development, operation maintenance of the zone. 17. It is also envisaged that since supplies from domestic tariff area to the special economic zone developer or to a unit, are eligible for duty drawback or DEPB, or for discharge of any other export obligation by the DTA supplier, the payment for such supplies shall be required to be made by SEZ developer or unit in freely convertible foreign exchange. If the payment is not made in foreign exchange, no drawback or DEPB will be allowed and it will not be treated as fulfillment of export obligation by the DTA unit. 18. Since the provisions of Chapter X A of the Customs Act and the corresponding Rules/ Regulations notifications will come into force with effect from 15-8-2003, it is requested that you may kindly go through the new notification referred to in the foregoing paragraph and the suggestion or deficiencies if any, may kindly be brought to the notice of the Board on priority. 19. Wide publicity may be given by issue of a Public Notice in this regard. 20. Kindly acknowledge receipt of this Circular. 21. Hindi version follows. C.P.Goyal Sr. Technical Officer (FTT) Tel. No. 011-23093859