As per The Economic Times of India: Finance minister Pranab Mukherjee on 7th May 2012, encouraging foreign banks to incorporate in the country,Â proposed to limit tax liability when they convert from branches into subsidiaries.
The Reserve Bank of India is in the process of formulating a scheme for local incorporation of Indian branches of foreign banks to ring fence local depositors from external shocks.
Existing laws require overseas lenders to pay up to 30% of the market value of their assets as capital gains and stamp duty while converting branches to a new entity.
“To support this effort, I propose to provide tax neutrality for such incorporation,” said Mukherjee in the Parliament on Monday.
The RBI, on the behest of the banks in December 2011, had sought a one-off tax exemption from the government for foreign banks that convert to local subsidiaries.
But foreign bankers are still skeptical of the proposed tax neutrality and are awaiting clarity on the matter. They are also awaiting clarity on national treatment and priority sector norms in the final guidelines.
“This was an impediment and tax neutrality would act as an enabling provision. Now, the path is open for RBI to set its guidelines,” said Bobby Parikh, chief mentor at BMR Advisory.
“The RBI will maintain some level of conservatism from a security and stability point of view. It will have to give banks some length of time to achieve the desired priority targets and other norms,” said Parikh.
“This is a positive step towards making incorporation favourable for foreign banks,” said Sanjiv Bhasin, CEO of DBS Bank, India.
On an average, the central bank issues about 14 branches to all foreign banks every year.