RBI balm fails to reduce foreign banks' headache

Wholly-owned subsidiaries to be exempt from capital gains tax, stamp duty

Foreign banks would not have to pay capital gains tax and stamp duty for converting their India branches into wholly-owned subsidiaries (WOS), the Reserve Bank of India (RBI) clarified on Tuesday.

But the clarification, in response to persistent queries from foreign banks three weeks after the WOS guidelines were issued, failed to impress most. Bankers said while RBI had reiterated an existing position, their specific queries on tax sops still remained unanswered.

RBI said the Centre had inserted a new chapter in the Income-Tax Act, 1961, exempting foreign banks from paying capital gains tax on converting branches into subsidiaries, effective April 1, 2013.

GREY AREAS REMAIN

RBI’s clarifications:

• Finance Act, 2012, inserted a new chapter in the I-T Act, 1961, exempting foreign banks from paying capital gains tax on conversion of branches into subsidiaries, with effect from April 1, 2013
• A new section, 8E, inserted in the Indian Stamp Act, 1899, vide Banking Laws (Amendment) Act, 2012, and notified in Gazette of India Notification dated January 18, 2013, exempting foreign lenders from payment of stamp duty on conversion of branches into subsidiaries

Foreign banks’ apprehensions:

• Other tax-related queries still unanswered. For instance, no clarity on deducting expenses on creating a subsidiary from foreign lenders’ taxable income
• No certainty if all states will agree to waive stamp duty on conversion of branches into subsidiaries
• High priority-sector lending targets may stress profitability of foreign banks choosing to create subsidiaries
• Reciprocity clause may prevent near-national treatment, despite converting branches into subsidiaries

But bankers said clarity was awaited on certain other areas of taxation. For instance, a few foreign lenders had requested RBI to consider deducting expenses incurred on creating subsidiaries from taxable income. The government has yet to clarify if that will be allowed.

Uncertainty also remains on the stamp duty front. RBI said a new section, 8E, had been inserted in the Indian Stamp Act, 1899, vide Banking Laws (Amendment) Act, 2012, and notified in Gazette of India, exempting foreign lenders from paying stamp duty on converting branches into subsidiaries.

A senior banker, part of the compliance team of a foreign bank in India, said: “We understand that stamp duty is a state subject and we are not sure if the central government, through a gazette notification, can override state laws. We need to be absolutely certain if we don’t have to pay stamp duty before we decide to set up a subsidiary here.”

Bankers fear farm lending requirements and stiff priority-sector lending targets may stress profitability of the foreign banks choosing to create subsidiaries here. Also, the reciprocity clause in RBI’s norms on subsidiarisation means foreign banks may not get unfettered branch access, even if they convert their branches into subsidiaries.

“Incorporating a local subsidiary will be based on the long-term organic and inorganic growth strategy in India. The business model has to make sense, keeping in mind the rural branch ratio, priority-sector lending, governance and capital requirements. It is good to have confirmation on tax matters, as it makes implementation clearer; taking banks that want to (or have to) incorporate, a step closer to that decision,” said Shinjini Kumar, leader (banking and capital markets), PwC India.

Ashvin Parekh, senior expert & advisor, EY in India, said, “The regulator is going a long way to meet the demands of foreign banks. It is now up to them to take this constructively and use the reform for a larger presence in India...this reform is a game-changer.”

RBI has said foreign banks that commenced operations in India before August, 2010, will have the option of conducting their business here either through branch mode or via subsidiary. But the foreign lenders that entered India after August 2010, will have to mandatorily set up subsidiaries.