The income tax department is against the blanket permission given by the Reserve Bank of India [Get Quote] to exporters for keeping their dollar proceeds abroad.

In its recommendation to the Central Board of Direct Taxes, the IT department has suggested that the profits and gains of newly-established undertakings in free trade and special economic zone should be allowed only when the exporter brings the dollar proceeds back to India. This should be done by suitable amendments to Section 10A of the Income tax Act, 1961.

RBI had earlier permitted exporters to park their dollars abroad for an indefinite period. Bankers explained that this measure was taken to prevent the dollar deluge last year when the rupee was fast appreciating on the back of foreign institutional inflows into the Indian equity market.

The spot rupee gained around 9 per cent in 2007, from 40.60/70 to a high of 39.23 to a dollar. Earlier, an exporter was required to bring back the dollars within six months from the end of the financial year. If the exporter wanted to keep the export proceeds overseas for more than six months, it needed to get RBI's approval.

The IT authorities said RBI's action is making it difficult for them to check whether the export has actually generated any dollar earnings before they allow the exemption to the profits from newly-set up units in SEZ and FTZs. Banks park dollar proceeds overseas in the exchange earner's foreign currency account.

Meanwhile, banks have sought tax exemption on the short-term deposits of up to three years or an increase in saving deposit rate from 3 per cent to 6-6.5 per cent. Bankers said that they have to jostle with mutual funds to garner short-term deposits. A representation has been made to the finance ministry to this effect.

Banks have to currently pay a high rate of interest to get deposits of three month to one-year maturity because of the tight liquidity position. According to bankers, this happens quite often since RBI has been pursuing a tight money policy to rein in inflation.

Three month-certificates of deposit, which is a short-term instrument floated by banks to raise deposits, is available at 10.40 per cent, while 10-year funds are fetching 9.15-9.25 per cent.

Bankers explained that they are putting funds into the mutual fund schemes, which is parked back with the banks when the mutual funds subscribe to the CDs of the banks. In essence, banks are paying a premium to get their own funds.