Selling from the zone into the domestic market

A unit in a special economic zone that starts selling into the domestic market is not doing a domestic sale with extra paperwork. In law the movement is treated as an import into India, and once that is understood most of the surprises in this area stop being surprises.

The governing idea

Goods removed from a zone into the domestic tariff area are chargeable to duty as if they had been imported Section 30, SEZ Act 2005. The rate, the value and the classification are therefore determined on the footing of an import of those goods in the form in which they leave the zone.

Everything else in this note follows from that single sentence.

What it does to value

The value is not simply the price at which the unit sells to its domestic customer. It is worked out on the basis applicable to imported goods, and that produces questions the unit has probably never had to answer before: what the assessable value of these goods is, in this form, at this stage of manufacture.

Where the goods are finished products, the analysis is usually manageable. Where they are part processed, or where the unit is clearing inputs it imported duty free rather than goods it made, the position needs care and it needs to be worked out before the first invoice rather than after the first audit.

What it does to rate and classification

The classification is of the goods being removed, not of the goods that were imported into the zone. A unit that imported components duty free and clears a finished article is being assessed on the finished article. A unit that clears the components as they were is being assessed on the components. Those are different headings and often very different rates.

Exemptions applicable to imports apply on the same footing, which is worth checking, because a unit that assumes it has no exemption available sometimes has one.

Capital goods and scrap

Sale of used capital goods and of scrap or waste out of the zone attracts its own treatment, and the depreciation position becomes central. It is worth computing the duty on the capital goods position periodically rather than discovering it at exit, when several years of depreciation, several removals and an exit application are all being examined at once.

The reporting consequence

Domestic sales do not earn foreign exchange, and net foreign exchange has to be positive cumulatively across the five year block Rule 53, SEZ Rules 2006. A unit that pivots substantially towards the domestic market without modelling the block position creates a performance problem at the same time as it creates a duty question.

That combination is what usually brings the Development Commissioner and the zone Customs into the same file. Both authorities read the annual performance report Rule 22(3), SEZ Rules 2006, and a position taken in one proceeding is quoted in the other.

Questions to settle before the first domestic order

1. In what form will the goods leave the zone, and what is their classification in that form.
2. How will the assessable value be computed, and can the workings be produced.
3. Does any exemption apply on the import footing, and on what condition.
4. What does the removal do to the net foreign exchange position for the block.
5. Does the activity as it will now be carried on still match the letter of approval, and does the approval need amendment first.
6. Which records will evidence each removal, and are they being created at the time.

The recurring lesson

Zone procedure assumes contemporaneous documentation. A removal that was entirely legitimate, but poorly documented at the time, is treated in a proceeding much the same as one that was not legitimate, because there is nothing to look at except the record.

Almost every zone dispute we see is a record that was not made rather than a position that was wrong. The remedy is unglamorous and it works: decide the treatment before the first removal, write it down, and create the document at the time.