Draft notification on foreign bank branch conversion to Indian subsidiary

New Delhi, Nov 17 (IANS) A draft notification was issued on Friday regarding tax exemption for capital gains arising from conversion of the branch of any foreign bank into an Indian subsidiary, inviting comments by stakeholders on the matter.

The exemption was introduced in the Union Budget of 2012, following which the Reserve Bank of India issued the guidelines for conversion of existing branches of foreign banks into wholly owned subsidiaries (WOS). Foreign banks are required to set up a WOS in the country.

"The Finance Act, 2012, inserted a new chapter consisting of Section 115JG in the Income-tax Act, which provides that in case the conversion of Indian branch of foreign bank fulfils the conditions notified by the Central government, the capital gains arising from such conversion shall not be chargeable to tax," a Finance Ministry release said here.

Moreover, "the provision relating to unabsorbed depreciation, set-off or carry forward and set-off of losses, tax credit in respect of tax paid on deemed income relating to certain companies and the computation of income in case of foreign company and Indian subsidiary shall apply with such modification, exception as may be specified in the notification", it said.

"It is proposed to issue notification specifying the conditions to be fulfilled by the conversion and also specifying modifications, exceptions, in applicability of certain provisions of the Act to such conversion," it added.

The Ministry has sought stakeholder suggestions by the end of November.

Following the global financial crisis of 2008, the RBI had designed the scheme to make foreign banks operate as wholly owned subsidiaries in the country in order to insulate local operations from any difficulties the parent company may encounter.

Thus, while issuing the guidelines, the RBI had pointed out that the WOS model for foreign banks would involve local incorporation, a local board of directors, and ring-fenced capital that would not be affected by the impact of global events on its parent.

The central bank had mandated that all the new foreign banks and existing ones have a required size to operate as a WOS.

So far, only 2 banks -- DBS Bank of Singapore and Mauritius' SBM Bank -- have received RBI approvals to set up WOS in India.

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