Its dream of creating special enclaves for exports in tatters because of changes in tax laws, the commerce ministry has decided to plead its case before the parliamentary standing committee looking into the direct taxes code bill during the monsoon session that begins in a month. 

An exporters' body says 15 approved special economic zones are considering dropping their projects after the budget for 2011-12 imposed minimum alternate tax (MAT) and dividend distribution tax on such zones. 

"We will make a case against the imposition of MAT and dividend distribution tax this fiscal as SEZs have been promised tax-free operations in the initial years by the SEZ Act," a commerce department official said. 

It is now becoming clear that it would not be viable for a number of investors to continue if faced with this unexpected financial burden, he added. 

The SEZ Act promises developers and units a five year tax holiday on profits. 

The direct taxes code ( DTC )) bill introduced by the finance ministry has proposed to end all exemptions through imposition of MAT and also link tax breaks to investments instead of profits. 

But even before the bill could be passed, the finance ministry imposed an 18% MAT and 15% dividend distribution tax on SEZs in the budget for 2011-12. 

The finance ministry wants to plug revenue losses from tax sops given to SEZs, estimated at 1,75,487 crore in the 2004-05 to 2009-10 period. 

Industry has argued that export units located in SEZs are not eligible for other export promotion schemes and have to pay full Customs duty on what they sell in the domestic market. It would not make commercial sense for them to operate in SEZs without tax exemptions. 

"It is not surprising that developers are pulling out because without the tax breaks it would be very difficult for them to sell to units," said R K Sonthalia , a Kolkata-based SEZ developer and former chairman of export promotion council of EoUs and SEZs, or EPCES. 

According to EPCES, Satyam Computer Service , MIDC, S2Tech.com, Essar Hazira, Bengal Shapoorji Infrastructure Development, K Raheja Universal and TCG Urban Infrastructure Holdings are some of the prominent SEZs that are considering de-notification of their zones. 

The direct taxes code bill is with parliament's standing committee on finance. 

"During the next House session, we will oppose the way the SEZ Act was undermined by the finance ministry through the backdoor by using the finance bill," the official said. 

SEZ developers have also filed legal cases against the imposition of MAT and DDT in high courts in Tamil Nadu, Andhra Pradesh and Gujarat. 

"The case in TN is coming up for hearing later this week," said Hitender Mehta , a Gurgaon-based consultant and expert on SEZs. Mehta said the imposition of taxes on SEZs has been challenged for violation of doctrine of legitimate expectation and promissory estoppel. (Economic Times)