India to Ensure Stricter Obedience to SEZ Laws

After successfully checking the ‘excess of inflow’ of gold in India, the country’s government now seems to have set its eyes on further tightening its noose around the neck of ‘round tripping’ (circular trading) being done by exporters from Special Economic Zones (SEZs).
Indian government had already imposed 2% import duty on polished diamonds in January 2012 with a view to arrest the practice of round tripping in the diamond-deals in which the same merchandises are traded over and over to gain cheaper capital, dupe banks, pad a company’s volumes or launder money.
Although the government has achieved positive results by introducing this measure (2% import duty) but still a lot remains to be done to eliminate this ‘evil’ practice to a desirable level. It has been learnt from the official sources that India’s Commerce Ministry may soon put a ban on jewellery imports through SEZs that are meant solely for the domestic market. The Ministry wants to introduce strict value-addition norms for the export of such products to ensure that the units are engaged in manufacturing and not in earning arbitrage profits.
The government intends to impose the ban after it came across a number of units in the Surat SEZ those were found to be indulging in gold, pearl and diamond trading instead of manufacturing. By breaking the law, SEZ units can earn a big margin of profits as high as 11.5% (10% Customs duty plus 1.5% excise duty). Diamonds attract a 2% import duty which adds to a huge profit-margin given the price of high-quality stones.
The officials have come across many such scandalous deals wherein diversion of gems and jewellery into the domestic market are done through SEZs, avoiding the import duty that’s otherwise due on such items. The facility provided by a SEZ is meant to be used by importers strictly for value addition and re-export. But the officials have noted that this is being used as a big loophole to inflate the balance sheet to earn cheaper bank loans.
So the government sources have directed the development commissioners of SEZs to conduct random checks of shipments of gems and jewellery units and examine deals done by the units in last three years. The government is also planning to install machines to check the purity of gold, diamond and platinum to ensure obedience to the norms. It is to be noted here that the government has already banned gold medallion manufacturing within SEZs in April and has made 3-5% value addition mandatory on all gold exports in July 2013.
Now if a parcel of diamonds makes four round trips, it means that for every USD 1 million worth of goods, the concerned exporter can get USD 4 million in financing. One can say for the sake of argument that this is a good arrangement. True, but it can be good only as long as you could pay back the loans.