Since the special economic zones (SEZ) Act was operationalised in 2006, investments of over Rs 1 lakh 34 thousand crore have flowed in to the tax free industrial zones. SEZs have helped create over 250,000 jobs. But the proposal to do away with profit-linked tax incentives in the direct tax code has put a brake on investment inflows.

Three years ago Saaiyur was a sleepy village in Tamil Nadu. But today it houses the Lotus Footwear SEZ factory that employs five-and-a-half-thousand people from surrounding areas and supplies shoes to Nike. This transformation of villages in to global sourcing hubs may be short lived as the tax incentives for future zones are proposed to be done away with from April 2011. Industry experts say, it will be impossible to get units up and running in the next nine months even in SEZs, where development is at an advanced stage. Developers of functional zones warn the provisions of the DTC will put a brake on the growth of manufacturing, employment and exports in the Indian hinterland.

Tapesh Sinha, General Manager Operations, Feng Tay Group, says, If the provisions of the DTC get implemented, the future growth of SEZ units may not be good.

These fears are already becoming a reality as investments to develop new SEZs have tapered off significantly since September 2009, a month after the first draft of the DTC was released.

In FY10, only 20 SEZs became functional as against 40 in FY09 and 56 in FY08.

Govt sources say proposed investments of Rs 10 lakh crore and 10 million new jobs in 500 SEZs in the next 10 years is at stake.

The Commerce Ministry maintains that SEZ units enjoy full income tax exemptions for a period of seven-and-a-half years, after which they become taxable. The ministry has been lobbying hard with its finance counterpart to tone down the provisions of the DTC so that SEZ units get taxed at a lower rate than units in the domestic tariff area.

SEZs like Mahindra World City in Chennai estimates investments of over Rs 5500 crore in the next five to seven years but their plans along with other SEZ developers could go off track if the provisions of the current DTC get implemented.