Union Budget 2021-22 (‘Budget’) was one of the most anticipated budgets given that it was the first Union Budget to be presented after the onset of the COVID pandemic. In the Budget, while the Finance Minister announced the repeal/suspension of a number of existing anti-dumping duties (‘ADD’) and countervailing duties (‘CVD’), the Finance Minister also proposed several legislative measures for strengthening the existing ADD and CVD mechanisms. With the recent enactment of the Finance Act, 2021 (‘Finance Act’), Parliament has given effect to these proposed legislative changes.

One of the important legislative changes introduced by the Finance Act, by amendment of the Customs Tariff Act, 1975 (‘CT Act’), is to allow for the imposition of ADD and CVD on goods removed from a Special Economic Zone (‘SEZ’) to the Domestic Tariff Area (‘DTA’). This article discusses the legislative changes made to the CT Act vide the Finance Act and the significance of these changes.

Fiscal regime for customs duties on goods imported by SEZs

The idea of SEZs was introduced to promote the export of goods and services from India. The SEZ Act, 2005 (‘SEZ Act’) and the rules made thereinunder constitute the legal framework for governing SEZs. Section 26(1)(a) of the SEZ Act exempts a SEZ unit (‘unit’) from payment of customs duties, including ADD, CVD, and safeguard duty (‘SGD’) on the import of goods to carry on the authorised operations. The authorised operations of the unit may include manufacture and export of finished goods by using imported goods.

However, sometimes, it may so happen that the unit may not be able to export the goods manufactured by it. The unit may then decide to clear the goods into the DTA for sale or other purposes. In such cases, Section 30 of the SEZ Act provides that goods removed from a SEZ to a DTA shall be chargeable with duties of customs including ADD, CVD, and SGD, where applicable, as leviable on such goods when imported into India.

As an example, if rubber is imported by a unit for the manufacture of tyres, but the rubber is cleared by the unit into the DTA as such, i.e., without being used for manufacture of tyres, such raw material will be exigible to customs duties as would be applicable on imports into India. Additionally, if, for example, ADD was leviable on imports of rubber into India, the unit would have to pay ADD at the time of clearing the rubber into the DTA.

In the event the unit manufactured tyres using the imported rubber, the unit would have to pay customs duties on the tyres at the time of clearing them into the DTA. However, since Section 30 concerns itself only with the goods that are removed from the SEZ to the DTA, no customs duties including ADD would be exigible on the imported rubber that was used to manufacture the tyres. This is a limitation of the provisions of Section 30.

With regard to ADD on the imported goods used by a unit to manufacture finished goods that are cleared to DTA, the implication is that this may lead to circumvention of ADD on such imported raw materials.

Trade remedial measures imposed by the Customs Tariff Act, 1975

While Section 30 of the SEZ Act does not impose any liability to pay customs duties including ADD/CVD/SGD on the imported goods removed from a SEZ to the DTA when incorporated into a finished good, the CT Act addresses the issue. Sections 8B, 9 and 9A of the CT Act empower the Central Government to impose SGD, CVD, and ADD, respectively, on goods imported into India. With regard to SGD, sub-section (6) of Section 8B expressly prohibits the imposition of SGD on goods imported by a 100% Exporter Oriented Unit (‘EOU’) or an SEZ Unit, except in the following circumstances:

1. where the customs notification imposing SGD specifically makes it applicable to an EOU or an SEZ Unit; or
2. the good imported is either cleared as such into the DTA; or
3. the good imported is used in the manufacture of any goods that are cleared into the DTA. In such a case, SGD is levied on that portion of the article so cleared or so used as was applicable when it was imported into India.

Thus, in the case of SGD, the CT Act empowers the Central Government to collect SGD that was originally foregone at the time of import of such good by an SEZ. However, in the case of ADD and CVD, prior to the amendment by the Finance Act, the CT Act did not have similar provisions. Though sub-section (2A) of Section 9A has provisions identical to Section 8B(6) in case of goods imported by EOUs, it did not cover goods imported by SEZ units. In the case of CVD, there were no provisions whatsoever for import of goods either an EOU or a SEZ unit.

As a result, where a raw material on which ADD/CVD was leviable was imported by an SEZ unit duty free, and used to manufacture finished goods, the unit could clear such finished goods to the DTA without payment of applicable ADD/CVD on the imported raw material. This created an odd situation where, an EOU would have to pay ADD on the imported raw material when cleared as part of a finished good, to the DTA, but a similar levy would not apply when the finished goods were removed by a SEZ to a DTA.

Further, even though, similar to ADD and SGD, CVD is intended to protect the domestic industry in India from injury caused by imports, no CVD was leviable on goods cleared into the DTA either by a SEZ unit or an EOU. This created an uneven playing field with the possibility of circumvention of ADD/CVD.

The curious case of Flextronics

Even though neither the CT Act nor the SEZ Act empowered the levy of ADD or CVD on imported goods removed to a DTA as part of finished goods, the Madras High Court in the decision of Flextronics Technologies India (Pvt.) Ltd. v. State of Tamil Nadu (TCR No. 35 of 2014 decided on 18 April 2016) (‘Flextronics’) held otherwise. In Flextronics, it was held that the moment such imported goods were removed from the SEZ to the DTA, they were no longer protected by the exemption given by Section 26 from the levy of ADD on goods imported by the SEZ unit and such goods automatically attracted ADD.

In justifying its decision, the High Court drew strength from the provisions of Section 30 to hold that ADD was leviable on goods cleared from an SEZ to the DTA. The High Court also seems to have been influenced by the objective of levying ADD to maintain a level playing field between imported and domestically manufactured goods, as pointed out by the Supreme Court in Reliance Industries Ltd. v. Designated Authority [(2006) 10 SCC 368].

However, it seems that it was not brought before the High Court that Section 30 does not charge any customs duties on imported goods that were used to manufacture finished goods cleared from a SEZ to the DTA. Instead, Section 30 only charges customs duties on goods cleared from a SEZ to the DTA as leviable on such goods when imported into India. Further, prior to the Finance Act, there were no provisions in the CT Act or the SEZ Act similar to Section 8B(6) of the CT Act which allowed for the levy of ADD on imported goods cleared by the unit into a DTA as part of a finished good.

Amendment by Finance Act, 2021

The Finance Act has amended Section 9 (CVD) and Section 9A (ADD) of the CT Act to allow for the levy of CVD and ADD on an imported good removed from an SEZ to the DTA, even when incorporated as part of finished goods. By the same amendments, the Finance Act has also levied CVD on imported goods removed from an EOU to the DTA, even when incorporated as part of a finished good. For ease of reference, the legal position before and after the enactment of the Finance Act is presented below:

Position before amendment by Finance Act

Position after amendment by Finance Act

Conclusion

The absence of legal provisions imposing ADD/CVD on imported goods removed from a SEZ to the DTA created a very uneven playing field. However, with the enactment of the Finance Act, the legal position has been rendered consistent. Further, though Flextronics rendered the legal position murky before the Finance Act, Flextronics tacitly identified the ‘missing link’ in the framework for the imposition of customs duties on goods removed from a SEZ to the DTA. This ‘missing link’ has now been filled by enactment of the Finance Act; a positive step in improving the coherence of the legal framework concerning SEZs and EOUs. This measure will also strengthen the Government’s ‘Make in India’ programme by affording necessary protection to the domestic producers from any dumped or subsidized imports.

[The author is a Principal Associate in WTO and International Trade practice team at Lakshmikumaran & Sridharan Attorneys, New Delhi]