Banks in non-processing areas of SEZs out of tax incentive purview

In an effort to prevent misuse of the tax benefits provided to special economic zones (SEZ) and increase clarity to the policy, commercial banks and their ATM units that are located within the non-processing zone of the SEZs would not be granted the status of an offshore banking unit (OBU). They will, therefore, not enjoy the incentives meant for OBUs.

The status of being an OBU is granted by the Reserve Bank of India (RBI) to those banks that operate within the processing zones of the tax enclaves where the units are located and which deal in foreign exchange that are sourced externally.

This direction was given in a recent notification by the Ministry of Commerce and Industry even though it did not favour the idea of demarcating the SEZs into processing and non-processing zones. “This has been done only to bring in greater clarity, particularly for the multiproduct SEZs as they are large areas with various kinds of activity going on,” a senior official of the Ministry of Commerce and Industry told Business Standard.

A non-processing area is that part of the SEZ which supports the social infrastructure for the development of the tax-free enclaves and houses residential buildings, hospitals, water plants, shopping malls and schools, among others.

“These kind of checks and balances are needed. Some of the banks were claiming the benefits even if they were in the non-processing zones. This applies to all kinds of activities in non-processing areas,” said Hitender Mehta of Vaish Associates Advocates, a Gurgaon-based law firm.

OBUs are virtually regarded as foreign branches of Indian banks. They are exempt from the key policy rates and provide access to SEZ units and developers to overseas finance at international rates.

“Tax benefits are given to only those operations which are engaged in export-related activities. But the banks or their ATM units should be given some kind of incentives for setting up operations there as indirectly they contribute to operations in the processing area. But how the income tax on the banks’ earnings would be computed needs to be scrutinised,” said Nishant Shah, associate partner, Economic Laws Practice.