Industry chamber Assocham has asked the finance ministry to exempt private banks that are raising foreign currency borrowing to finance infrastructure projects, from paying withholding tax.

It has urged the ministry to exempt these banks from paying withholding tax on interest charged on such borrowings, Assocham said in a release. In a representation sent to the ministry and the RBI, Assocham president Venugopal N Dhoot has said there is no level playing field for private banks as public sector banks raising borrowings in foreign currencies from their overseas branches are exempt from levy of such withholding tax.

"It is well recognised that foreign currency borrowings are a cost effective source of funds for corporates and infrastructure financing. Banks also raise such funds to meet their commitments in infrastructure or priority sector lending," Assocham said in the note.

"However, the withholding tax on interest paid on such borrowings has in a way affected the cost structure of borrowings and given rise to increase in rates for lending by banks," it added.

The chamber said it has thus asked the finance ministry to review this in its forthcoming budget proposal for 2007-08. The removal of this tax would attract inflow of funds into India and develop forex based treasury management services, besides promoting the concept of equity, it said.