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OBUs Likely To Lose Tax Breaks

Posted on 13 February 2008,    
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Withdrawing direct tax benefits to offshore banking units (OBU) on the profits earned from special economic zones (SEZs)is a new proposal of the Finance Ministry. This could prove a major setback to developers, as tax exemptions and other benefits to OBUs gave them cheaper financing options for SEZs. The proposal is expected to be taken up at the next eGoM on SEZs. Provisions under the OBU scheme, announced by the Reserve Banks of India in November 2002, exempted OBUs from maintaining the statutory liquidity ratio and cash reserve ratio. They are also not required to pay income tax for the first five years and only on half their revenues in the next five years. They can also raise funds abroad and deal in foreign exchange. Analysts said the move would increase the costs of OBUs, which, in turn, would be passed on to SEZs, thereby increasing overall funding costs. A bank official with an OBU in an SEZ said the withdrawal of tax exemptions would reflect on their financial products, which are priced after factoring in the tax exemptions. The finance ministry is of the view that increased borrowings by SEZ developers and units from OBUs would lead to a swelling of the country’s external debt. There are seven OBUs in SEZs: one each in Cochin SEZ (SBI) and Noida SEZ (Canara Bank), and the remaining at the SEEPZ SEZ in Mumbai (ICICI, SBI, Punjab National Bank, Bank of Baroda and Union Bank of India). Naresh Makhijani, partner (finance), KPMG said, “If tax exemptions are withdrawn with retrospective effect, it might also lead to litigation.”

 



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