Foreign Banks Setting Up OBUs In SEZs Not To Get I-T Benefits

New Delhi, May 23: | Updated: May 24 2003, 05:30am hrs
The government has denied branches of foreign banks operating in India the benefit of tax exemption under Section 80LA of the Income-Tax Act, 1961, and the facility to make investment overseas. This is expected to discourage them from setting up overseas banking units (OBUs) in special economic zones (SEZs).

A commerce ministry proposal for granting banks this exemption has been shot down by the finance ministry. However, eight applications from Indian banks to establish OBUs have been approved so far with 24 more expected next month. Of those cleared, four are from the State Bank of India and one each from the Central Bank of India, Punjab National Bank, ICICI Bank and Oriental Bank of Commerce. One of the OBUs will be located in the SEZ coming up in Indore (MP).

Speaking to FE, Mr DK Mittal, joint secretary, commerce ministry, in charge of SEZs, said these OBUs, expected to be operational by next month, would be in a position to provide, term loans at internationally-competitive rates besides working capital for the SEZs, now that they had been exempted from cash reserve ratio and statutory liquidity ratio stipulations imposed by the Reserve Bank of India. He said the proposal was forwarded to the finance ministry before clause-by-clause consideration of the Finance Bill was taken up in Parliament during the Budget session. But it was not included when the amendments to the Bill were finalised by the finance ministry which gave a new defintion of OBUs, he added.Section 80LA provides for 100 per cent tax exemption for the first three years and 50 per cent for the next two years.

No hitch was anticipated in permitting subsidiaries of foreign banks if they were registered as a bank in India for setting up OBUs, he clarified.

As many as 17 SEZs have already been approved by the government. Implementation is at an advanced stage in a number of zones, including Positra in Gujarat, Nanguneri in Tamil Nadu, Dronagiri in Maharashtra, Kakinada in Andhra Pradesh and Gopalpur in Orissa. A number of other sops have been announced for SEZ units in the 03-04 Exim Policy.

These include IT concessions, exemption from Central Sales Tax to supplies from domestic tariff area (DTA) to SEZ, extension of drawback to DTA suppliers, export treatment of transactioins from DTA to SEZ under Income-Tax Act and Customs Act and exemptiom from external commercial borrowing restrictions.

According to a commerce ministry-sponsored report on SEZ prepared by the Industrial Development Bank of India, India has a great potential to emerge as a preferential manufacturing base in the global market if the government puts in place an internationally-competitive SEZ package and an efficient administrative mechanism.