The finance ministry may exempt up to half of the profit generated by an offshore banking unit in the special economic zones from corporate tax. This, however, falls short of the commerce ministry's proposal to tax OBUs at 5 per cent.

"The revenue department has agreed to the proposal for a lower rate of taxation for offshore banking units, but the exact percentage is yet to be finalised," a senior government official said.

He said the final rate would be announced by Finance Minister Jaswant Singh as part of the amendments to the Finance Bill. The matter has been referred to the Reserve Bank of India for its comments, he added.

A reduced corporate tax rate will serve as a major concession for banks seeking to set up offshore banking units.

While banking companies pay 35 per cent corporate tax now, foreign banks operating in India through branches pay 40 per cent tax.

In his Exim Policy speech, commerce and industry minister Arun Jaitley had announced the government would offer fiscal sops to SEZ units and offshore banking units.

Though the Reserve Bank of India issued guidelines for offshore banking units in November, no branches have been set up so far.

Officials, however, said the banks have shown some interest and at least half-a-dozen banks, including State Bank of India and Bank of Baroda, have approached the RBI for permission to set up units.

In the guidelines, the Reserve Bank of India has prescribed a minimum contribution of $10 million by the parent bank to its offshore banking unit for starting operations.

Public sector, private and foreign banks, authorised to deal in foreign exchange would be eligible to set up offshore banking units, but those with overseas branches and experience in running offshore banking units would be accorded preference.

Each eligible bank would be permitted to establish only one such unit, which would essentially carry out wholesale banking operations.

It has also restricted the rupee dealings of offshore banking units by permitting direct dealing only in foreign currency.

The commerce ministry proposed to tax offshore banking units at 5 per cent.

The final rate of taxation will be announced by the finance minister as part of the amendments to the Finance Bill.

The matter has been referred to Reserve Bank of India for its comments.