Cag Report Reveals a rs. 2,000-Crore Revenue Leakage in SEZ Units

With units in special economic zones (SEZs) permitted to treat their
domestic sales as export earnings, the government had to forgo revenue
amounting to nearly Rs. 2,000 crore, the Comptroller and Auditor-General
of India (CAG) has revealed.

Making a case for an amendment to the SEZ Act, the CAG, in its report
presented to Parliament on Tuesday, said: "SEZ units have been
achieving the prescribed net foreign exchange earnings (NFE) mainly
through domestic sales, defeating one of the sub-objectives of the scheme,
which was to augment exports."

The government had to forgo Rs. 1,043 crore by way of customs duty
exemptions alone to these units. A total duty of Rs. 106.71 crore along
with an interest of Rs. 46.17 crore was recoverable from 24 SEZ units
which failed to achieve positive NFEs.

While the duty foregone on the SEZ scheme during the period from 2000-01
to 2005-06 was Rs. 8,842 crore, the duty foregone during 2006-07 would
be Rs. 2,146 crore as per budget estimates.

Turning to the disadvantage suffered by export oriented units compared
to the SEZ units, the CAG said duty amounting to Rs. 681.38 crore was
foregone on the inputs used in the manufacture of mobile phones which
were cleared into the domestic tariff area (DTA) at nil duty in the
SEZs. This could not be recovered as there was no provision to pay back
the duty foregone on inputs utilized by producers of such goods when
these were cleared at nil duty in the DTA.

Referring to a specific case of duty thus foregone, the report said
an audit scrutiny of Nokia India in the Madras SEZ showed that the unit
cleared mobile phones worth Rs. 4,855.69 crore in 2005-06 and 2006-07
in the DTA at nil duty. And, in the absence of enabling provisions in
the SEZ Act, the Rs. 681.38-crore duty foregone on inputs used in the
manufacture of mobile handsets could not be recovered.

Revenue Loss

As for the target plus scheme, the report said exporters had availed
themselves of higher trade benefits by submitting fake export certificates.
This resulted in a revenue loss of Rs. 294.95 crore. In some other duty-free
credit entitlement schemes such as the Vishesh Krishi Upaj Yojana also,
exporters had availed themselves of about Rs. 350-crore credit wrongfully.

Thus the total duty foregone under various export promotion schemes
in 2006-07 was Rs. 66,368 crore, working out to 77 per cent of the total
customs receipts during the fiscal year. Included in this was an unrealized
customs duty revenue component of Rs. 2,555 crore at the end of 2006-07;
of this Rs. 292 crore was an undisputable amount over 10 years.

On revenue leakages in service tax, the CAG pointed out that a large
number of unregistered service providers were escaping the tax net.
The total additional revenue that could have been mopped up by the government
as a result of audit intervention was Rs. 159 crore, the CAG said and
asked the Finance Ministry to enhance scrutiny of service tax returns.

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