Curbs may nix foreign bank OBUs

The preferential tax treatment given to domestic banks may force foreign banks into a rethink on setting up offshore banking units in India.

As per the Finance Bill, 2003, these banks have been denied the benefit of deduction in respect of their banking income derived from OBUs even as the same has been extended to scheduled commercial banks incorporated in India.

That foreign banks have been denied the advantage of deduction in respect of certain incomes derived from OBUs is underscored by the fact that an amendment to the Finance Bill, 2003, explicitly allows "a deduction to a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) owning an OBU in an special economic zone in respect of its banking income subject to certain conditions".

A scheduled bank, which has set up an OBU in an SEZ, will be eligible for a deduction from its gross total income of 100 per cent of its banking income (as specified in Section 6 (1) of the Banking Regulation Act, 1949) earned from the OBU for the first three years beginning with the year in which the permission to set up the OBU is obtained, the Bill says.

Thereafter, such income is eligible for a deduction of 50 per cent for two consecutive years. To avail of the deduction (under Section 80LA - that deals with tax incentives to OBUs), which has been introduced by way of an amendment, scheduled banks have to satisfy a few other conditions.

The deduction will be available in respect of income from banking business with an undertaking located in the SEZ or any other undertaking which 'develops', 'develops and operates', and 'operates and maintains' a SEZ.

The income should be received in convertible foreign exchange in accordance with the regulation made under the Fema, 1999.

According to the Bill, OBUs essentially carry out international wholesale banking business involving non-resident foreign currency denominated assets and liabilities.