Union Budget 2014: Govt should remove regulatory disparities to encourage SEZs

In an era where business dynamics are achieving great pace, there have been parallel attempts by regulatory bodies to cut down or modify regulatory hurdles. Such measures are aimed at easing the operations of businesses. In the process of making such regulations, many a time, it is seen that the final outcome has an inherent disparity with the intention behind making such regulations.

When we talk of Special Economic Zones (SEZ), a couple of such regulatory disparities may be observed in regard to:

A.    Provision of Service by an SEZ unit to a unit in Domestic Tariff Area (DTA)

B.    Setting up of a Disaster Recovery Centre (DRC) or Business Continuity Plan Centre (BCP)

A.    Provision of Service by an SEZ unit to a unit in DTA
In terms of Section 30 of the SEZ Act, 2005, SEZ units, subject to certain conditions, are allowed to remove the goods to the Domestic Tariff Area (DTA) upon payment of applicable Customs duties and realise the money in Indian currency. However, Section 30 remains silent about the condition or procedures to be followed for rendering of service in DTA. But there is no bar on the SEZ units to provide authorised services to DTA if the same is specified in the "Letter of Approval" issued by the Development Commissioner.

At this juncture it is also important to refer to Section 2(z) of the SEZ Act, 2005, which defines the term 'Service'. For an activity to qualify as a 'Service' under Section 2(z), one of the condition is that such service should earn foreign exchange. Accordingly, it becomes imperative that the realisation of money for providing services, export or to a DTA unit must and should be in foreign exchange. Accordingly, the DTA unit, by virtue of RBI circular No. A.P (DIR Series) 46-RBI/2012-13/259 dated Oct 23, 2012, may purchase foreign exchange from category I authorised dealers and make the payment to the SEZ unit which provided such services.

When it is said in Section 2(z) that foreign currency should be earned, it would not be incorrect to understand that the intention is to receive the same from a country outside India against export of services.  

Further, such realisation also is a step towards meeting the economic concept of 'balance of payments surplus'. However, when an SEZ unit is required to realise foreign exchange on provision of services to DTA, it would amount only to exchange of Indian currency for foreign currency and not be considered as foreign currency earned. This would also not go to achieve 'balance of payments surplus'.
As for removal of goods in DTA, no such condition is posed and there is no reason service by a SEZ unit in DTA to be considered or treated differently as compared to removal of goods by a SEZ unit in DTA.

Accordingly, the requirement of earning foreign exchange on services to DTA would only increase the procedural compliance and associated costs. Additionally, if the SEZ units do not realise the amount in foreign currency on DTA services then it would provide the SEZ authorities to allege non-compliance of provisions of the SEZ Act, 2005 and initiate legal proceedings which is unwarranted.

Instead, to do away with the disparity between removal of goods to vis-a-vis rendering of service by an SEZ unit in DTA, the definition of service may be suitably amended to mandate the requirement of collection of foreign currency only with respect to services exported out of India. Further, to concur with the intention of the SEZ Act, 2005, which is promotion of export from India, a monetary threshold can be specified beyond which the SEZ unit may not render services to DTA units.

B.    Setting up of DRC or BCP by IT/ITES unit located in SEZ
 
In the layman's language, a DRC can be understood as a standby centre for storing data back-ups and in some cases may also provide for plug and play workstation desks. Normally, DRC's are set up in an isolated location away from the main premises from where day-to-day operations of a business are carried on. The purpose of having DRC is to ensure the continuity of business operations in the event of any disaster arising from natural or manmade causes.

The Department of Commerce (SEZ Division) under the Ministry of Commerce and Industry has, vide Circular No. D.12/25/2012-SEZ dated February 20, 2013, provided for guidelines for setting up of DRCs by IT/ITES units located in SEZs. While the intention of issuing such circular was to provide for setting up of DRCs at any location outside SEZs, including in another SEZ or EOU, the same has been looked at by authorities as a location outside SEZs but only within another SEZ or EOU. Accordingly, approvals for setting up of DRCs are being granted by Development Commissioners only if such DRC is located within another SEZ or EOU.

Such interpretation by the SEZ administering authorities has mandated the IT/ITES units in SEZ to locate the DRC only within another SEZ or EOU. This entails increased cost of compliance and operations when compared to units in Domestic Tariff Area (DTA) in terms of rent and statutory compliances.

A further clarification by the ministry in this regard specifically permitting setting up of DRC in DTA with necessary administrative controls would be a welcome move much appreciated by the trade.

Conclusion
Going forward, it is hoped that the regulations are brought out after giving due consideration to its implications on industry and trade and are also interpreted in letter and spirit by keeping in view the intention behind making such regulations. This would give some respite to businesses and also enable them to achieve cost optimization and increase competitiveness.

Sachin Menon, National Head of Indirect Tax, KPMG in India, and Srinath S, Senior Advisor -Indirect tax, KPMG in India