The commerce department is holding consultations with SEZ developers and units on the proposed direct tax code drafted by the revenue department in order to recommend suitable changes to the finance ministry.

The department has already written to the finance ministry pointing out that the provisions for SEZs in the draft code, which would lead to a curtailment of tax exemption that is enjoyed by SEZs, goes against the SEZ Act.

Speaking to ET, a commerce department official, who did not wish to be named, pointed out that consultations with individual developers and units and councils such as the export promotion council for EoUs and SEZs had started.

When we get all required inputs, we will begin our discussions with the finance ministry on the changes that the commerce department wants in the draft direct tax code, the official said.

As per the provisions of the draft DTC, tax benefits on profits to be enjoyed by a developer of an SEZ will only be limited to the recovery of capital and revenue expenditure incurred by the developer (not including the expenditure on land).

Under the SEZ Act, SEZ developers are entitled to 100% tax exemption on profits for 10 years in a block of the first 15 years of operation of the SEZ. SEZ units, on the other hand, are entitled to 100% tax exemption on export profits in the first five years of operation. They are eligible for 50% exemption on export profits for the next five years while for the following five years, units get up to 50% exemption on reinvested profits.

As per the proposal, in case of SEZ units, too, profit-linked incentive would be substituted by a new scheme. In the case of SEZ units, if the substitute scheme is to our liking, then there would be no problems. We will try our best to ensure that units continue to get the exemptions that they get under the present SEZ rules and Act, the official said. The tax proposals for developers, however, need an over-haul.

We are still examining which sectors would be most affected by the new proposed dispensation. We will have a clearer understanding of the situation after our consultations with stakeholders, the official added.

The proposed direct tax code aims to simplify and rationalise the direct tax structure by doing away with exemptions and reducing tax rates. The government will finalise the tax code after extensive discussions with all ministries and departments, the industry and the public.