The commerce ministry's move to frame all laws for the development of special economic zones has run into problems, with the finance ministry waking up to the fact that its powers to frame tax policies will be clipped under the proposed law.

Ministry officials have apprised Finance Minister Jaswant Singh of the Cabinet note drafted by the commerce ministry. The officials are planning to ask the Cabinet secretariat to return the note.

If the commerce ministry does not take back the Cabinet note, the finance ministry is likely to ask the commerce ministry to hold further discussions on the controversial clauses.

Finance ministry officials, however, acknowledge that trying to scuttle the move so late will be problematic. But the ministry is left with no other choice in the matter, because if the Cabinet approves the bill, all powers to frame tax and banking policies on SEZs will go to the commerce ministry. This will include setting the income-tax and excise duty rates.

Senior officials of the ministry, including the revenue secretary, have briefed Singh on the issue. The finance minister is reported to have asked for a detailed presentation on the matter.

During his tenure, several departments including company affairs from the law ministry and the Foreign Investment Promotion Board from the commerce ministry have been added to the finance ministry.

The move to give commerce ministry the exclusive right to frame all policies on SEZs was undertaken by altering the allocation of business rules for the ministries in November last year.

Based on the change, which was then not contested by the North Block, the commerce ministry went ahead by formulating a detailed policy on SEZs. It also conducted discussions with the finance ministry on how the tax laws should be framed, even as the latter claimed that it had no knowledge about the proposed changes.

Matters came to a head when the commerce ministry asked the finance ministry not to issue a set of notifications on indirect tax duty relief for SEZ units in their transactions with firms outside the zone last month.

The commerce secretary wrote to the revenue secretary claiming that since under the allocation of business rules it was his department's right to issue such notifications and it would be prudent to wait for the clearance of the SEZ Bill.

But officials in the revenue department said such a policy would mean that all tax proposals regarding SEZs would emanate from the commerce ministry. "It is almost like presenting two sets of Budget figures annually," they said.

In addition, the officials also pointed to the level of corruption among the users of the export promotion schemes, which is administered by the commerce ministry.