The Finance Ministry indicated that the revised Direct Taxes Code (DTC) draft may stick to denying tax sops to special economic zones (SEZs), even as Commerce Minister Anand Sharma assured that the interests of investors will be protected.
Stating that profit-linked incentives were "distortionary", the ministry said SEZs had failed to boost the manufacturing sector--as was expected from them.
"The Commerce Ministry should first give its appraisal on what is the current state of SEZs, before demanding continuation of income tax benefits," a senior finance ministry official said.
According to the official, the ministry feels that SEZs have concentrated only on a few specific sectors, and not helped turn India into a major manufacturing hub.
"SEZs were meant to be export processing units, while they have turned into export zones for only IT and processed diamonds ... Where are the manufacturing units that were supposed to have come up in SEZs?" the official said.
Over 60 per cent of the 578 approved SEZs are in the IT-related sector.
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Further, the official cited the draft DTC as saying, "Profit-linked deductions are distortionary in nature as they create an incentive to inflate profit as well as transfer profits from a taxable entity to a non-taxable one."
While the industry is up in arms against the proposal and is banking on the commerce ministry's support, the finance ministry believes that SEZs failed to serve the purpose for which the incentives were given, the official said.
"There are definitely differences between the two ministries on tax concessions for new SEZ units," he added.
The DTC draft has denied the 10-year income tax benefits to new SEZs units.
After meeting Finance Minister Pranab Mukherjee on Friday, Anand Sharma had said that the interests of investors in SEZs would be protected to the "best extent possible".
Earlier, Revenue Secretary Sunil Mitra had said that while the Finance Ministry was not looking into revisiting the DTC draft proposal, it may go for investment-linked benefits for SEZs.
A Bill on the DTC is expected to be introduced in the monsoon session of the Parliament, starting later this month.