The commerce ministry has demanded that income tax on overseas banking units be lowered in special economic zones to attract investment.

Banking companies pay 35 per cent tax on their profits, and branches of foreign banks are taxed at 42 per cent.

The ministry has also demanded that units in special economic zones enjoying a five-year tax holiday and paying 50 per cent duty in the subsequent two years be given an additional three years to pay half the prescribed tax.

If this is accepted, the units will be exempt from paying taxes in the first five years and will have to pay only 50 per cent of the prescribed tax in the subsequent five years.

Alternatively, the commerce ministry has proposed that after the seven-year period, 50 per cent of profits, if reinvested, should be exempt from income tax.

Moreover, the revenue department is already considering waiving the special additional duty.

The government has also decided to close down the export processing zone scheme. The existing ones have been converted into special economic zones.

On the issue of lower tax rates for branches in overseas banking units, government officials said efforts were on to create an environment wherein these banks would operate on the same terms as foreign banks.

A reduction in tax rates will help attract the best banks into the zones.

Officials said the revenue department proposed to announce income tax benefits for developers in the Exim Policy on March 31.

They added that a law on special economic zones would be introduced in Parliament in 2003-04. The draft Bill has been sent for comments to the ministries and is expected to be ready for introduction in July.

The revenue department has also agreed to extend the duty-entitlement passbook (DEPB) scheme and duty drawback benefits to units in special economic zones.