The new Direct Tax Code (DTC) bill is likely to hurt exports, employment and investment in the Special Economic Zone (SEZ) if the government does not implement right measures for exemption of taxes in the DTC Bill which will be enacted as a law, effective from April 1, 2012, says L.B.Singhal, Director General, Export Promotion Council for SEZ and EOUs (EPCES).

The Export Promotion Council for SEZ and EOUs (EPCES) have clearly stated that by altering the SEZ Act through the proposed Direct Tax Code (DTC), the government is sending the wrong message to investors which will certainly affect exports, employment and investment in the SEZs, Singhal said.

Singhal told SME Times: "The progress in the SEZ scheme in terms of exports, employment, and investments has been made only after the SEZ Act has been operational since February 2006. It is a very short period of time that the SEZ has made such a progress. I think the Act should not be altered by any legislation. It should continue and it should not be altered by DTC at all."

The first draft on DTC, which was brought out by the government last August, actually raised many questions amongst stakeholders. Certain questions were raised about the continuation of tax breaks under the SEZ Act.

For SEZ developers the DTC moots provisions that the SEZs which are notified on the date of implementations of the DTC will get Income Tax exemption provided in the SEZ Act. But, the for the SEZ which will come after the DTC is implemented will get different set of incentives as provided in the DTC Bill. However, the revised draft does not states clearly about grandfathering the SEZ units.

Singhal said, "If the government does not provide any benefits to the Special Economic Zone (SEZ) units naturally nobody will set up units in SEZs and if units are not set up in the SEZs then why would SEZ developers set up infrastructure. Ultimately SEZs are developed so that exporters come and develop and set up factories in the SEZs."

While, the revised draft which came in June 2010 brought in the provision to grandfather the SEZ units, the revised draft on DTC also raised questions because the government has exempted the existing SEZ units but did not provide benefits to the new units.

The DTC Bill also moots a provision that SEZs which are notified till March 2012 will get income tax exemption as provided in the SEZ Act, but SEZs which are notified after the March 2012 will get investment linked incentives/ exemptions as provided in the DTC Bill.

The revised draft on DTC has also provided the SEZ units with the profit-linked exemptions, which means whatever profits the units are making will be exempted from Income-Tax for a period of 10 years. And also the new DTC draft gives provision with the investment-linked exemptions which are performance based and target the incentive specifically to the capital investment.

"The government is providing with the Income-Tax exemption to those SEZ units which will be operational by March 31, 2014  as provided in the present SEZ Act. And, the units which will become operational after March 2014 they are being provided with the investment-linked exemptions," he added.

Singhal said, "Since the government has done it already, it is difficult because the time period which has been provided to the SEZ units is insufficient. The units which will be operational by 2014 (which means the SEZ units which will become operational after 2012) they are getting two years time. However, a SEZ developer gets three years time for developing the SEZ units as per the SEZ Act and it can also be extended further."

He also said that after the notification is given for developing the SEZ, it is after the notification that the SEZ developers take forward the process. So, the minimum time period which the SEZ gets is three years, that means the time period should be till 2015, which is not given at present and when once the SEZ becomes operational then the SEZ units can start setting up their business.

Besides all these, the DTC Bill seeks to levy Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) on SEZ developers.

"Earlier, the SEZ units were also exempted from the Minimum Alternative Tax (MAT) under the SEZ Act. Now they are saying that MAT will be applicable on the units. And also the rate have also been increased to 20 percent. So, the government is not providing complete grandfathering," Singhal added.

At present, the SEZ Act provides special tax benefits to the SEZ units which include duty free import/ domestic procurement of goods for development, operation and maintenance of SEZ units; total Income-Tax exemption on export income for SEZ units for the first five years, 50 percent exemption for the next 5 years thereafter and 50 percent of the ploughed back export profit for next five years; exemption from MAT as well as permission for external commercial borrowing by SEZ units up to $500 million in a year without any maturity restriction through recognised banking channels.

The SEZ developers are exempted from customs/ excise duties for development of SEZs for authorised operations approved by the Board of Approvals; I-Tax exemption on income derived from the business of development of SEZs in a block of 10 years in 15 years; exemption from MAT and DDT.

The total SEZ exports in the first quarter of this fiscal year (2010-11) has been at Rs. 58,685.46 crore which shows a growth of 68 percent over the corresponding year. The export in SEZ in the year 2009-10 has been at Rs. 2,20,711.39 crore which shows a growth of 121.40 percent.

As on June 30, an investment of Rs. 1,66,526 crore has been made in SEZs and direct employment for 5,50,323 persons have been generated.