The direct tax code (DTC) could be in the eye of a storm. Special Economic Zone (SEZ) developers are exploring options to sue the government if tax benefits under the SEZ Act are withdrawn as a result of the proposed code. Media report.

Developers of special economic zones are not going to retreat or surrender without a fight. Lawyers and industry experts have told Media that several developers are exploring legal options if the tax benefits to new SEZ units get scrapped under the DTC.

Their main weapon will be the doctrine of promissory estoppel, which can be invoked if tax incentive clauses under the SEZ Act get scrapped for SEZ units. Developers, who are working on their zones maintain that it is impossible to achieve 100% occupancy by April 1, 2011, the cut-off date when the new code comes into effect. As a result, investments made by the developers will not yield any returns and demand for SEZ space will crash.

The doctrine of 'promissory estoppel' essentially stops the government from withdrawing the benefits which they had committed and based on that investors, the developers, have invested huge amounts, they made financial commitments. If they (the government) withdraw these benefits subsequently, then there are settled laws, settled by the Supreme Court in umpteen number of judgments that the government cannot withdraw those benefits on the basis of which the investments were committed by the investor, Hitender Mehta, Partner, Vaish Associates, explained.

Over Rs 1,44,000 crore have been invested in the tax free zones over the past four years because of the income tax incentives promised under the SEZ Act.

According to estimates, investments of Rs 10 lakh crore are expected in about 500 SEZs over the next 10 years.

Commerce Ministry officials say prospective investments in export oriented industries based in SEZs may shift to tax free zones in Asean countries if the tax incentives are taken away.