The commerce department has decided to ask the finance ministry that the proposed direct taxes code retain the tax benefits available to the units located in special economic zones (SEZs), as it fears changes in the tax regime for SEZs could affect the flow of investments to these zones.

The draft tax code, which seeks to simplify and rationalise the direct tax structure, has proposed a flat 25% tax on corporate profits against the current 34%, including various cesses, but in exchange has suggested all exemptions be withdrawn.

The units located in SEZs enjoy tax rebate under section 10AA. SEZ units are entitled to 100% tax exemption on export profits in the first five years of operation.

For the next five years, units can enjoy 50% exemption while in the following five years, units get up to 50% exemption on reinvested profits. SEZ developers, on the other hand, get 100% tax exemption on profits for any ten years in a block of the first 15 years.

The draft direct tax code has not clarified in what manner SEZ units will be given incentives. The commerce department has decided to insist that for SEZ units, section 10AA of the income tax act should continue to be applied, a commerce department official, who did not wish to be identified, told ET.

The SEZs have attracted more than Rs 1,00,000 crore since the SEZ rules were enacted in February 2006. For SEZ developers, however, the going may be tougher as the draft tax code has clearly specified that tax relief will be limited to the recovery of capital and revenue expenditure of developers.

We are also going to express our unhappiness with the provisions in the tax code for developers and ask them to change it. We are in consultations with the industry and would soon come up with our proposal, he said.