The government is likely to clarify in the budget that special economic zone or SEZs would continue to enjoy tax benefits in their current form even after the proposed direct taxes code is implemented, providing clarity over taxation of these special enclaves.

The move follows commerce department’s demand for clarity on taxation of SEZs, arguing that the proposed direct taxes code had created uncertainty amongst existing and potential investors over the kind of tax breaks they would get once the new code is in place.

The proposed direct tax code, which is tentatively scheduled to be implemented next year, talks about replacing the current tax exemption on profits with sops on investments made by developers.

Moreover, the tax code is not clear about the tax treatment of units located in the SEZs. The changes in the tax regime, if executed, could substantiually reduce the tax benefits enjoyed by SEZs, especially in sectors such as IT where investments are low.

“SEZ developers are hesitating in taking investment decisions as they are unsure about whether they would be able to attract units if there is uncertainty in the taxation regime,” said Vikram Bapat, executive director, PwC.
Even the units that have have already made investments were also apprehensive of losing out on tax benefits in the near future and new units, with long gestation periods, couldn’t make out whether they were going to benefit at all from the policy.

“In fact, we have heard from developers that the proposed tax regime is having an effect on current demand from potential unit owners,” Mr Bapat said, adding that some clarity at this point would improve the investment climate.
Pointing out that SEZs were doing very well, L B Singhal, director general, export promotion council for EoUs and SEZs, said that SEZ investors were promised a stable policy regime.

“It should be made absolutely clear that the existing units and developers would continue to enjoy sops under the SEZ Act,” he said.

The commerce department, meanwhile, is continuing to push for totally delinking SEZs from the proposed DTC. “We want SEZs to keep benefiting from provisions under the SEZ Act,” the official said.

However, he added, while the country was finalising its view on the DTC, it was imperative to bring in clarity about the fate of existing investors.

Under the SEZ Act, SEZ units get 100% tax exemption on profits earned for the first five years, a 50% exemption for the next five years and another 50% exemption on re-invested profits in the following five years. SEZ developers, on the other hand, get 100% tax exemption on profits for ten years which they can choose in the block of the first 15 years.

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