The uncertainty over tax benefits for special economic zones, or SEZs, arising out of the proposals in the draft direct taxes code seems
to have started impacting flow of investments into these enclaves. The number of new applications for setting up dropped to three this month.

A worried commerce department is already in discussions with the finance ministry on the fallout of the proposed code on the SEZ policy.

We get enquiries by the dozens from investors over what would happen to their investments once the DTC comes in, a commerce department official told ET.

There is a lot of apprehension that profit projections made on the basis of the existing SEZ Act may go awry once the new tax code comes in, the official added.

The board of approval, which gives the green signal to new zones, has received only three applications for consideration in its meeting scheduled on Tuesday. The board had received six proposals each in the previous two meetings and eight proposals in each of the preceding two meetings.

We are not surprised by the declining numbers as setting up new zones may not seem as attractive as before, the official said.

The draft direct taxes code has proposed withdrawal of exemptions for new units that come up after the tax code is implemented and replacement of tax exemption on profits for developers with sops on investments.

The direct taxes code is expected to implemented from the next fiscal year.

SEZs may also attract minimum alternative tax (MAT) of 18% as the proposed DTC has no provision of giving any sector exemption from this levy.

The shift from profit-based tax exemption to investment-based tax exemption for developers would adversely affect sectors such as IT where investments are low.

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 fifteen years.

No duty on transfer from DTA to SEZ: SC

The Supreme Court on Monday said transfer of goods from domestic tariff areas (DTA) to special economic zones (SEZ) is not subject to export duty, reports PTI from New Delhi. The Supreme Court was hearing a plea filed by the Centre challenging an order of the Gujarat High Court barring export duty on goods supplied to exportoriented SEZs from DTAs. An SC bench dismissed the plea of the Centre that any transfer of goods from a DTA to an SEZ falls within the meaning of an export.