Tax clarity for subsidiary model of foreign banks

The government has proposed to make it clear which foreign banks converting their branches in India into subsidiaries would be exempt from capital gains tax. Experts said this would address the tax concerns of foreign banks planning to operate in India via the subsidiary route. But non-tax matters would still guide their plans.

After the RBI had issued a framework for converting foreign banks’ branches into subsidiaries in 2013, only DBS Bank and State Bank of Mauritius had received in-principle approval to adopt this route. The income-tax department recently came out with a draft notification that gave detailed operational conditions to ensure foreign banks converting branches into subsidiaries were exempted from capital gains tax. It also proposed to allow carry forward of minimum alternate tax credit. 

Explaining the draft provisions, Rajesh Gandhi of Deloitte said the main requirement was that the foreign parent should own the entire share capital of the subsidiary.

Besides, the foreign parent should derive no benefit on conversion except getting shares of the new subsidiary. “This is a boost to the government’s intention to encourage foreign banks to convert to subsidiary structures,” he said. 

The notification also permitted carry forward of unabsorbed tax loss and depreciation by the subsidiary. 

This move took away one of the main concerns of foreign banks — tax leakage on conversion. But foreign banks would still consider the impact of conversion on operational flexibility, priority sector lending, support from the parent’s balance sheet and higher corporate governance requirements in a subsidiary structure, Gandhi said. 

A subsidiary structure provides various benefits, including the ability to grow inorganically through acquisitions. Therefore, the decision to use the subsidiary route would depend on the business model of each bank and the nature of its expansion plans, experts said. Comments on the proposals can be sent till November 30. 

The RBI scheme, announced in November 2013, gave wholly-owned subsidiaries of foreign banks a level playing field in India. The RBI prefers foreign banks to operate in India as a subsidiary rather than as a branch as that would ring-fence their Indian assets and liabilities from global operations and make regulation easier. 

The draft notification follows the Finance Act, 2012, that had inserted a new Chapter in the Income-Tax Act, 1961, detailing the special provisions relating to conversion of an Indian branch of a foreign bank into a subsidiary company.