New Delhi: A proposal by the ministry of commerce and industry asking state governments to exempt special economic zones (SEZs) from state and local taxes has drawn flak from some states.

In a brief prepared by it on issues concerning state governments and SEZs for a first-of-its-kind conference of state industry ministers convened by commerce and industry minister Anand Sharma on Tuesday, the ministry said: “Many state governments are to issue notifications for exemption of state and local taxes. In some states, there is a policy but in the absence of notification benefits are not being allowed. In some states, while developers are being allowed concessions, co-developers and units are not allowed the same.”

However, some states including Madhya Pradesh and Kerala are opposed to the idea. “Local bodies run on local taxes. If they will not impose such taxes then they can not build and maintain the necessary infrastructure. So such taxes should be allowed to be imposed on SEZs,” said Kailash Vijayvargiya, minister for commerce, industries and employment, Madhya Pradesh.

The commerce ministry, however, defended its stand citing the Constitution and an Act implemented by the Gujarat government.

Aricle 243Q of the Constitution provides for the incorporation of industrial township authority to manage the affairs of the industrial townships, the ministry said. “The state governments (should) ensure that local bodies do not make demand on the developers and units to pay taxes,” the ministry said in the prepared brief.

It also cited the Gujarat SEZ Act by which SEZs are kept out of the jurisdiction of any municipal council, corporation, notified area or panchayat.

However, state governments see the Centre’s proposal as an infringement into their domain of taxation which may lead to potential revenue loss. Kerala finance minister Thomas Isaac had expressed his reservations regarding any such direction by the Centre in an earlier interaction with Mint.

SEZs consider imposition of local taxes such as value-added tax (VAT) as double taxation as local sales from their units are subject to import duties. Besides, VAT is not applicable on imports.

The commerce ministry also asked the state governments to create enabling legal framework for SEZs. Till now, only a few states such as Gujarat, Haryana, Madhya Pradesh, West Bengal and Tamil Nadu have come up with their own SEZ Acts.