WoS of foreign banks to be exempt from capital gains tax: RBI

Earlier this month, RBI had said that foreign banks with complex structures will have to operate in India only through wholly-owned subsidiaries

The Reserve Bank today said that conversion of existing foreign bank branches into wholly owned subsidiaries in India will neither attract any capital gains tax nor stamp duty.

"In this context...'Special Provisions relating to Conversion of Indian Branch of a Foreign Bank into a Subsidiary Company' in Income Tax Act, 1961, inter alia, exempting capital gains arising from such conversion from capital gains tax, with effect from April 1, 2013," RBI said in a release.

The RBI said it was receiving queries from foreign banks regarding capital gains tax and incidence of stamp duty on conversion of existing foreign bank branches into wholly owned subsidiaries.

"As regards applicability of stamp duty...Exempting from stamp duty any conversion of a branch of a foreign bank into wholly owned subsidiary or transfer of shareholding of a bank to a holding company," RBI added.

Foreign bank desirous of converting their branches into wholly owned subsidiaries may take into account the above developments, the RBI said.

Earlier this month, RBI had said that foreign banks with complex structures and which do not provide adequate disclosures would have to operate in India only through wholly-owned subsidiaries (WoS) in order to regulate and avoid 2008-like crisis.

It also allowed foreign banks to list their subsidiaries in the local stock exchanges.

The initial minimum paid-up equity capital or net worth for a WOS should be Rs 500 crore, RBI had said.

However, it gave the foreign banks operating in India before August 2010 the option to continue their operations in branch model.

There were 43 foreign banks in India with a network of 333 branches as of March 2013. At present, foreign banks have presence in India only through branches.

The guidelines were issued on the back of 2008 global financial crisis, which according to the RBI has shown that growing complexity and inter-connectedness of financial institutions have compromised the ability of home and host authorities to cope with the failure of big banks.