Branches of foreign banks denied tax exemptions

The government has denied branches of foreign banks operating in India the benefit of tax exemption under Section 80LA of the Income-Tax Act...

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 the banks this exemption has been shot down by the Finmin. 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).

D.K. Mittal, joint secretary in the Commerce Ministry incharge 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.

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Mittal 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 definition 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. A number of other sops have been announced for SEZ units in the 2003-04 Export and Import policy.