SEZ: Submission requesting for clarification on debonding of secondhand IT assets from SEZ to DTA

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SEZ: Submission requesting for clarification on debonding of secondhand IT assets from SEZ to DTA

Tejasvi

@tejasvi

September 20, 2022

Public Policy

2682

Background

Pursuant to COVID-19 pandemic, many companies operating in Special Economic Zones (SEZs) want to move out and set up units in Domestic Tariff Area (DTA) due to business reasons. Some companies want to shift certain percentage of their employees in virtual locations (DTA) permanently. This will also require movement of IT hardware (like laptop, desktop, monitors. processors and other networking devices) that are deployed by such units.

In order to exit from SEZ or move employees from SEZ to DTA, units are required to de-bond their IT hardware that were deployed to employees tagged to SEZ unit.

Currently, the Special Economic Zones Act, 2005 (SEZ Act) read with Special Economic Zones Rules, 2006 (SEZ Rules) do not prescribe any specific provisions for de-bonding of duty paid assets to DTA. The SEZ Rules only prescribes procedure to be followed for movement of duty-free assets from SEZ to DTA.

In such a case, SEZ authorities treat clearance of goods that were being used by SEZ units for its authorised operations to DTA as import of 'second hand/used goods'. As a result, provisions prescribed under Para 2.31 of Foreign Trade Policy (FTP) relating to import of secondhand goods apply on such DTA clearances.

As per para 2.31 of FTP, import of secondhand IT products is restricted. The importer is required to get permission/ authorisation from Directorate General of Foreign Trade (DGFT) before importing these products.

Issues

Obtaining authorisation/ licence from DGFT for de-bonding

We have highlighted to the government that custom officers are pressing on the need to obtain authorisation from DGFT for de-bonding such assets (as stated in paragraph 2.31 of the FTP) from SEZ units to DTA. The officials are treating them as import of secondhand/ used goods into India, since SEZs are considered as foreign territory.

It is important to note that FTP merely restricts import of secondhand/ used IT assets for the first time into India. However, the restriction does not apply to goods/IT assets (as specified in Para 2.31 of the FTP) that have already been imported and are accessible in India, either in DTA or SEZ units. We would also like to highlight that there are no provisions under FTP that prohibit clearance of used IT assets (as described in paragraph 2.31 of the FTP) while debonding from SEZ to DTA. Such products are not being brought into India from another country for the first time. In reality, SEZ units are a part of India and the government grants them the designation of "foreign territory" to promote exports.

We understand that the practice of issuing DGFT authorisation has not been followed in the past, and the authorities have not issued authorisation for de-bonding assets from SEZ to DTA unit. As a result, members are facing lot of issues in debonding used IT assets from SEZ to DTA units.

It is important to note that under other exports scheme prescribed under FTP namely, Software technology parks of India (STPI), Export Oriented Units (EoUs) or Bio-Technology Parks (BTP), there is no requirement to obtain license from DGFT/ any other authority for de-bonding IT assets. Further, SEZ /Free Trade Zone Regulation of the Asia-Pacific (APAC)/ European Union (EU) region do not prescribe conditions for surrender of duties and taxes in case of untagging of goods from SEZ unit.

Denial of depreciation benefits

As per Rule 49 of SEZ Rules, SEZ unit may remove capital goods to DTA on payment of duty. The applicable duty is payable on the depreciated value of capital goods. Custom officers are insisting SEZ units to pay duty on the original value of the IT assets and not on the depreciated value, while de-bonding secondhand IT products. The SEZ Act/ Rules nowhere restricts the benefit of depreciation in case of secondhand IT assets.

Recommendation:

We have made a submission to SEZ and Customs officials requesting them to issue a circular/ instruction stating that there are no restrictions on de-bonding of secondhand/ used IT assets. The restriction on import of IT asset as provided in Para 2.31 of the FTP applies only when the IT assets are being imported in India for the first time. We have also requested them to clarify that SEZ unit will be entitled to depreciation benefit while making payment of duty on de-bonding of capital goods. This will help in facilitating ease of doing business in India.

We hope you will find the update useful. In case of more information, kindly write to tejasvi@nasscom.in and garima@nasscom.in

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Tejasvi