Special economic zones (SEZs) are set to lose more sheen with the government ready to withdraw tax benefits available for non-processing activity — such as duty concessions on inputs used in building schools, hospitals or residential units — amid concerns over developers availing of the fiscal concessions only to offload the assets in the open market.

Sources said there are instances of developers building residential units and leasing them to entities that were not part of the zone. Since then the zone in Maharashtra has been de-notified, although an investigation showed that the developer had not availed of duty concessions to build the units. In another case in Maharashtra, the developer of a zone got around 10 acre of non-processing area de-notified on which an international school has been set up. Again, the board of approvals sought a certificate from the developers saying that no benefits have been used and in case any concessions were given the tax has to be refunded to the government.

There are other instances too, officials acknowledged, which has prompted the commerce department to review the concessions on offer as the revenue department has mounted a fresh offensive against the zones that it has for long believed are mere real estate ventures. The issue has figured prominently during discussions with the commerce department on reworking the policy to make it more attractive for investors and revive investment. Sources said the commerce department too is of the view that developers would not mind giving up the option of getting duty-free inputs for non-processing work. "In a way it limits them. If there are no takers within the zone, what do you do?" an official asked.

Currently, there are 158 SEZs in the country, with seven set up by the government, and a majority engaged in information technology or IT-enabled services. The likely withdrawal of the remaining duty concessions would be the latest blow to the zones which were once touted as India's answer to China's mega zones and a tool to bridge the manufacturing gap in the country. But the finance ministry, which blamed SEZs for shifting of manufacturing and IT units from the domestic tariff area, withdrew one of the biggest attractions — a direct tax holiday — by introducing minimum alternate tax (MAT).