The finance ministry has tightened the noose around developers of special economic zones by disallowing tax concessions to their contractors involved in the construction work.

According to Budget proposals, the 10-year tax benefits under Section 81A of Income Tax Act will be limited to those developers who themselves execute the development work and not to those who only take up civil construction for the special Economic zones.

What could come as a bolt from the blue for developers is the fact these changes would be applicable retrospectively from April 2000 and valid for assessment year 2000-01 onward. 

For checking migration of existing industries to the SEZs for availing of tax sops, the Budget also makes it clear that the tax breaks would be given to the units, which began production from April 2006.

The proposals provided in the Finance Bill 2007 would impact a large number of promoters who were planning to bring in construction and real estate companies as partners. Of the 63 SEZs notified, only six have been promoted by real estate players like DLF, Rahejas and Ansal.

This would also push up the construction cost for the non-real estate promoters of SEZs like Satyam Computers,
Wipro, FAB City, Reliance and Biocon. 

Most of these promoters had worked out their project costs taking into account tax concessions both for themselves
and the contractors.

As the Finance Bill rules out tax breaks for contractors, the overall costs of the SEZs are likely to go up.