Branch policy may hold the key for foreign banks

The direct taxes code (DTC) may bring some change in the game for foreign companies as it proposes to reduce corporate tax rates. While for foreign banks, the Reserve Bank of India’s (RBI’s) discussion paper could be a key point, the tax rates, even if significant, may be just another factor in deciding if they want to have a wholly-owned subsidiary in India.

Despite the reductions, the tax rate for foreign companies might still be marginally higher after the DTC, said Sunil Shah, leader, business tax, at Deloitte India.

Even though the tax rates appeared uniform, they were slightly higher for foreign companies, said Shah. The effective tax rate for a foreign company could be about 40.5 per cent, including the dividend distribution tax, compared with about 39.13 per cent for a domestic company, he said.

“Tax won’t be the driver,” said Ashvin Parekh, national leader, global financial services, Ernst & Young. “The dividend distribution tax negates any tax reduction. The main driver will be any branch expansion policy in RBI’s discussion paper.”

RBI planned to come out with a discussion paper on presence of foreign banks in India as a branch or a wholly-owned subsidiary by September, it said in its annual monetary policy statement in April. RBI said there was considerable merit in subsidiaries of banks with significant cross-border presence, as no international agreement on cross-border resolution mechanism for internationally active banks was likely to be reached in the near future.

“The fact that the rates of tax have declined is directionally positive,” said Shah. “It does raise some hope there could be a further reduction in the times to come. Tax is one of the criteria for a company. Others may include flexibility of operations, limitation of liability, and certainty in taxations.”

Officials at foreign banks in India declined to comment saying they were still studying the implications of the proposed tax rates.

RBI, in its ‘roadmap for presence of foreign banks in India’ had said in February 2005 that ‘initially those foreign banks wishing to establish presence in India for the first time could either choose to operate through a branch presence or set up a 100 per cent wholly-owned subsidiary, following the one-mode presence criterion.

Foreign banks already present in India were also allowed to convert their existing branches into wholly-owned subsidiaries, which were to be treated on a par with the existing branches of foreign banks for expanding branches in India. No foreign bank had exercised the option of starting or converting into a subsidiary since the 2005 norms, it said.