Foreign banks converting their branches into wholly-owned subsidiaries will not be required to pay capital gains tax from the transfer of assets and properties during this procedure. The finance ministry has resolved the tax tangle in the issue and wants the Reserve Bank of India (RBI) to go ahead and allow foreign banks to convert themselves into wholly-owned subsidiaries at the earliest.
“There were some tax issues in conversion of branches into wholly-owned subsidiaries. We have resolved that matter. The new norms should come as soon as possible,” said a finance ministry official.
Last week, RBI had released a discussion paper on the presence of foreign banks in India. It had sought comments on the subsidiary-led model for foreign banks operating in India, instead of the existing branch mode of expansion. It also proposed incentives to promote the subsidiary route.
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In its discussion paper, RBI had said that for capital gains tax arising from the transfer of property, goodwill and other assets of a capital nature to its newly incorporated subsidiary in India, the provisions of Section 47(iv) of the Income-Tax Act, 1961, would be applicable to foreign banks converting their branches into subsidiaries.
Section 47(iv) exempts from capital gains tax the transfer of a capital asset by a company to its subsidiary if the parent company or its nominees hold the entire share capital of the subsidiary or the subsidiary company is an Indian company. The exemption, however, does not apply if the parent company dilutes its stake in the subsidiary before a period of eight years.
“You have to continue with the parent-subsidiary relation for eight years if you want the exemption,” said Hiresh Wadhwani, a tax partner with Ernst & Young. He added that for full capital gains tax exemption without a lock-in of eight years would require an amendment to the law.
The issue has been resolved under Section 49(e) of the Income-Tax Act, which states that where the capital asset becomes the property of an assessee under any such transfer, the cost of acquiring the asset would be deemed to be the cost for which the previous owner of the property acquired it. “If there is no change in the value of assets, there will be no capital gains tax,” explained another official.
The first official also said the central bank’s discussion paper was in line with the finance ministry’s thinking that a subsidiary model would help contain risk within the country. “The government greatly favours this,” he said.
He added that just like domestic banks, subsidiaries of foreign banks would be allowed to open branches in Tier-3 to Tier-6 cities, unlike branches of foreign banks. The subsidiaries would be considered Indian banks and regulated by RBI, the official added.
