The Hindu Business Line : 100 per cent EoUs

THE Centre is said to be planning a new Bill on Special Economic Zones and Export Oriented Units. At this time the actual role played by EoUs in the Domestic Tariff Area (DTA) — that is, the local market — the concessions given to them, and the effect of concessions on the non-EoU manufacturers are worth a review.

According to non-EOU manufacturers, a 100 per cent EoU is a misnomer. For the Exim Policy's Chapter 6 Para 6.8(b) states that EoUs may sell goods/services in the DTA up to 50 per cent of the f.o.b. value of previous year's exports subject to fulfilment of minimum Net Foreign Exchange Earnings as a percentage of exports (NFEP) on payment of applicable duties. (The duties were exempted up to 50 per cent later by notifications.)

Thus, it is a misnomer to call them 100 per cent EoUs when they export only approximately two-thirds of their production.

Also, Notification No 2/95-CE dated April 1, 1995 exempts all excisable goods manufactured by a 100 per cent EoU from a portion of the duty of excise leviable thereon under Section 3 of the Excise Act as it is in excess of the amount equivalent to 50 per cent for goods sold in the DTA.

Notifications 8/97 and 23/2003 dated March 31, 2003 confer such an exemption if the goods are produced or manufactured wholly from raw materials manufactured in India. But the government does not appear to have considered that some materials — such as catalysts, which have to be imported — also form part of the finished goods. The EoUs ignore this and seek exemptions given in the Exim Policy.

In the case of Commissioner of Central Excise and Customs Indore vs Century Denim (EoU) 2001(129) ELT 657 (tri-Del), the CEGAT Court No IV of Delhi had held that wherever imported materials are used, the benefit of Notification No. 8/97 is not available. The Supreme Court also confirmed this in its July 20, 2001 order while disposing of the civil appeal No 4017/2001 in the Maral Overseas Ltd appeal.

Yet, the EoUs continue to avail themselves of the benefits of Notification No. 8/97 and 23/2003. The DTA sale has to be made not exceeding 50 per cent of the f.o.b. value of the previous year exports.

While the f.o.b. value is ascertainable and verifiable, for DTA sales no standard method is available/defined to ascertain assessable value. Thus, the EoUs adjust their DTA sale value to suit the limitations prescribed under Para 6.8(b).

On the purchase front, the EoUs buy capital goods, raw materials, consumables and packing materials for their operations. Chapter 6, Para 6.22(b) allows EoUs to import without payment of duty all types of goods including capital goods which may be imported on payment, free of cost or on loan from clients. Para 62(c) permits purchases from bonded warehouses in the DTA, that is, from the local market, without payment of duty.

The important point here is that there is no restriction on the quantity or value of the purchases. Also, the seller does not know whether the purchase includes materials for production for DTA sales also, other than exports.

Para 6.12 (a) states that supplies made from DTA (purchases within India) to EoUs will be regarded as deemed exports and the DTA supplier shall be eligible for relevant entitlements under Para 8.3 which gives the following benefits:

(a) Advance licence for intermediate supply/deemed export,

(b) Deemed exports drawback, and

Other than the above benefits, Para 6. 12(a) gives the following benefits:

(i) Reimbursement of Central Sales Tax,

(ii) Exemption from payment of Central Excise more than 50 per cent,

(iii) Not relevant to industries, and

(iv) Reimbursement of duty paid on fuels procured from domestic oil companies at the rate of drawback notified by DGFT.

Thus, it is immaterial whether the capital goods or raw materials are imported or locally purchased. This facility was given by the Centre to encourage exports and to facilitate competition in foreign market. This had resulted in lower costs to the EoU buyer.

Unfortunately, this facility is being misused by several EoUs in local sales. They do not pay duties and sales tax at the time of purchase of raw materials and are thereby able to reduce their raw material cost by as much as 25 per cent than a non-EoU manufacturer.

The variable cost of a product for an EoU manufacturer is always less than a non-EoU manufacturer. The depreciation per unit of an EoU manufacturer is also less than that for a non-EoU manufacturer because the former did not pay any duty on the capital goods imported whereas the latter would have. This helped the EoU manufacturer dump in the local market at a price up to 25 per cent lower than a non-EoU seller.

If a foreign country dumps into India, an anti-dumping case can be filed, but if an Indian manufacturer dumps due to benefit from a government policy, what is the competition to do? This problem is faced by all industries wherever there is an EoU/SEZ, irrespective of the product.

All non-EoU manufacturers face the discriminatory situation due to the benefits given by the Exim Policy. They have to face unfair competition engendered by the present Exim Policy. Many companies and trade bodies have represented to the government to end the discriminatory treatment to the EoU units in the DTA market. These include the Indian Chemical Manufacturer's Association, the Chemical Industries Association and the All-India Manufacturer's Association. About a year back, steel wire and rope manufacturers were similarly affected and they also made a representation.

The manufacturers of di-ethyl phthalate (DEP), impacted by this situation, have taken up this issue too.The Finance/Commerce Ministers must analyse all these anomalies and incorporate changes in the new Bill, including certain clauses to safeguard the local industry, stop dumping by local EoUs, and prevent uncompetitive and cheap prices, which are artificial, because a part of the cost saved due to the above facilities given to EoU are due to the Exim Policy.

Also, the exchequer is continuously losing several crores of rupees by way of input duties foregone and lower finished goods duties

The new Exim Policy must plug these loopholes and provide for allowing the exemptions and export incentives to be restricted pro-rata to actual physical exports.

The sales in the DTA must be based on the quantity exported and f.o.b. value than merely restricting it to f.o.b. value of the previous year's exports. This will make for healthy and fair competition by all manufacturers, whether EoU or non-EoU in the domestic market, and ensure a level playing field for all.

(The author is Senior Manager — Costing, Thirumalai Chemicals Ltd., Chennai.)

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