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Finance ministry tax vexes Mumbai international financial hub plan
February, 12th 2008

In a move that could stymie the governments grand plan to develop Mumbai as an international financial centre, the finance ministry has said the exemption from securities transaction tax (STT) should not be provided in the case of International Financial Service Centres (IFSCs). Income-tax benefits available to offshore banking units (OBU) located in the centres should also be withdrawn, the ministry has emphasised.

Withdrawal of tax breaks would virtually put paid to the long-pending ambition to develop Mumbai as an international financial hub. The government came out with a detailed report last year to outline the roadmap for turning Mumbai, the financial capital of India, into an international hub for financial services on the lines of London and New York. Various countries, including the US and the UK, have shown interest in sharing their experience and providing inputs to put Mumbai on the global financial services map. Incidentally, it is the finance ministry that has been emphasising on the need to develop Mumbai as a global financial centre.

STT exemption to stock exchanges in IFSCs is part of the concessions provided under the SEZ Act. No IFSC has come up so far and Mumbai has been identified by the government as the suitable location for an international financial hub. The IFSC concept envisages provision of all financial services in one place to make it attractive for investors and service providers.

The SEZ law also enables OBUs to enjoy income-tax benefits similar to SEZ units. In addition, OBUs enjoy flexibility in accessing overseas funds and operating foreign currency accounts.

According to highly-placed government sources, the demand from North Block for withdrawal of STT exemption to IFSCs and imposition of income tax on OBUs is part of the overall opposition to the Special Economic Zones Act. IFSCs were to be developed under the ambit of the SEZ law. OBUs are part of SEZs and their purpose is to provide financial services to SEZ units at internationally-competitive terms.

The finance ministry has also demanded scrapping of the capital gains benefit available to those shifting industries from urban areas unless the units are relocated to rural areas. If a promoter is shifting an SEZ unit from one rural area to another, the capital gains benefit should not be provided, the ministry has argued.

Officials have also called for imposition of dividend distribution tax on SEZ developers. The demands have been placed by top finance ministry officials for consideration of the empowered group of ministers (EGoM) on SEZs which is headed by external affairs minister Pranab Mukherjee. Initially, the North Block demand was to revisit the income-tax benefits available to SEZ units and developers, but it has been enlarged subsequently to include a whole gamut of tax concessions flowing from the SEZ Act.

It is expected the EGoM would meet soon to take up the demands of the finance ministry and the plea from the commerce department to allow some multi-product SEZs to expand beyond the ceilings imposed by the government due to protests from rural stakeholders. The sources said the commerce department was opposed to withdrawal of the tax benefits and a detailed case would be presented before the EGoM.

The finance ministry has also opposed notification of two port-based SEZs, emphasising that SEZs should come up only on vacant land. Finance minister P Chidambaram has written to Mr Mukherjee on the issues, seeking early decisions from the EGoM.

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