The draft Direct Taxes Code (DTC) along with a Discussion Paper was released for public discussion in August 2009.  The Discussion Paper mentioned that profit-linked incentives are inherently inefficient.  Essentially, a profit-linked incentive is regressive in nature.  Consequently, there is an inbuilt incentive for laundering and shifting of profits to the exempted activity.  Since profit is the basis for exemption, there is no-incentive for investment and up-gradation during the period of tax holiday.  Such profit-linked incentives also lead to significant loss of revenue and encourage rent-seeking behavior.  Therefore, the Code proposes to substitute the currently available profit-linked incentives by investment-linked  deductions for specified sectors including SEZs developers.  Investment-linked incentives are better directed instruments since they are performance based and target the incentive specifically to the capital investment.  With regard to the profit-linked incentives available to SEZs, the draft Direct Taxes Code (DTC) proposed the following:

-     provision for profit-linked deduction currently available to SEZ developers for the unexpired period for  all SEZs which are notified on or before the commencement of DTC;

-     provision for an investment-linked deductio  for all SEZ developers notified on or after the ate of commencement of the DTX;

-     Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) to be levied on SEZ developers;

-     no rotection of the profit-linked deduction available to SEZ units for the unexpired period of the deduction left to them after the date of commencement of the DTC;

-     no ax benefits for SEZ units set up on or after the date of commencement of the DTC; and

-     MAT on all SEZ units.

A number of inputs, including from the Ministry of Commerce, were received on the proposals outlined in the draft DTC and Discussion Paper.  These inputs have been examined and the major issues on which various stakeholders have given their views have been identified.  These issues have been addressed in the form of a Revised Discussion Paper which was released in June 2010.

The revised Discussion Paper modifies the proposals for SEZ units to also protect the profit-linked deduction for the unexpired period for SEZ units beginning operations before 31.3.2011.

This information was given by the Minister of State for Finance, Shri S.S. Palanimanickam in  a written reply to an Unstarred Question raised in Rajya Sabha today.

Investment linked deductions replace profit linked incentives for SEZ developers, with MAT and DDT applied and limited transitional protection. Draft Direct Taxes Code replaces profit linked incentives with investment linked deductions for SEZ developers; grandfathering protects profit linked deductions for SEZs notified before commencement for their unexpired period, while SEZs notified after commencement receive investment linked deductions. The draft introduces Minimum Alternate Tax and Dividend Distribution Tax on SEZ developers and subjects SEZ units to MAT; a revised Discussion Paper restores transitional protection for units commencing operations before a specified cut off date.