By Matthias Williams
NEW DELHI, March 10 (Reuters) - India's finance and trade ministries are locked in a dispute over a tax on export hubs announced in last week's budget, adding to a sense of regulatory uncertainty in the crisis-hit New Delhi government.
The trade ministry wants to strike down an 18.5 percent duty on book profits in so-called Special Economic Zones (SEZs), hubs with long tax holidays that were set up in the footsteps of fellow Asian giant China to foster manufacturing growth.
Trade Minister Anand Sharma expressed "surprise" at the budget announcement made by his counterpart in the finance ministry, Pranab Mukherjee, and wrote a letter in protest amid worries of an exodus of developers in the zones.
On Thursday, the top bureaucrat in the trade ministry, Rahul Khullar, said the tax would likely act as a brake on rapid growth in the zones and send the wrong signal about India's investment climate.
"Exports have grown at a huge clip from SEZs because people have made investments, because people have received assurances that there will be tax breaks," Khullar told reporters.
"If the MAT (Minimum Alternate Tax) ends up altogether discouraging both foreign and domestic investment, what are we achieving?" he said.
"The levy of MAT acts as a disincentive in two ways. One is that the rules of the game are changed midstream, so somebody is going to turn around and say it's not fair," Khullar said.
"The second and far more serious implication is this. Supposing you are a prospective investor, wanting either to set up an SEZ or invest in a SEZ by establishing a unit, you are not going to do it."
India rolled out the policy of SEZs hoping to create millions of new jobs, attract investment and boost manufacturing through tax breaks and fiscal incentives.
New Delhi wants SEZs to raise India's manufacturing output to catch up with years of IT- and services-driven economic boom, as Asia's third-largest economy returns to near double digit growth seen before the 2008 financial crisis.
The dispute comes as a series of graft scandals create a sense of regulatory uncertainty in the country, especially in the telecoms sector, which has come under intense scrutiny after faulty allocation processes were said to have cost the government upto $39 billion in lost revenue.
Prime Minister Manmohan Singh has had to fend off accusations that he was running a "lame duck" government after months of corruption scandals paralysed parliament, rattled investors and slowed the pace of economic reforms.
The merit of the zones has been hotly debated since their inception, both on their economic performance and on the social cost of land acquisition needed to create profitable SEZs in a country with hundreds of millions of rural poor.
Rights activists have long called for the zones to be scrapped amid violent protests. The finance ministry says tax breaks to exporters in the zones have drained revenue.
Pranab Mukherjee in his budget speech on Feb. 28 said the new tax on the zones would make the corporate tax burden fairer.
The zones have attracted firms such as Reliance , which set up the world's largest oil refining complex in an SEZ in the western state of Gujarat, as well as cellphone giant Nokia and sporting goods maker Adidas .
Exports from the zones will likely rise to around $70-75 billion in the current financial year ending March, up from roughly $55 billion last year, Khullar said.
(Editing by Sanjeev Miglani and Sugita Katyal)