Mumbai, Nov. 26: The Reserve Bank of India (RBI) today clarified that foreign banks would not have to pay stamp duty and capital gains tax when they converted their existing foreign bank branches into a wholly owned subsidiary.
The central bank issued the notification to allay the fears of foreign banks that the conversion would entail heavy taxation.
The RBI said the Centre had inserted a new chapter in the Finance Act of 2012 to deal with this specific issue. The chapter XII-BB — titled Special Provisions relating to Conversion of Indian Branch of a foreign bank into a subsidiary company — in the Income Tax Act of 1961 exempts “capital gains arising from such conversion from capital gains tax with effect from April 1, 2013,” the notification said.
The apex bank added that as regards applicability of stamp duty in the case of conversion of existing branch of a foreign bank into a wholly owned subsidiary, a new section “8E” has been inserted in Indian Stamp Act, 1899 through Banking Laws (Amendment) Act, 2012 notified in Gazette of India notification on January 18 this year. It exempts stamp duty on any conversion of a branch of a foreign bank into a wholly owned subsidiary or transfer of shareholding of a bank to a holding company in terms of the scheme or guidelines of the RBI.
Banking circles said the clarification should come as a relief for foreign banks desiring to convert their operations into the subsidiary route. They said there was lack of clarity about whether or not stamp duty would be applicable in such an event.
There are 43 foreign banks present in the country and there are two routes in which they can be present in India: either through a subsidiary or a branch. However, all of these foreign banks operate as branches.
The RBI has been trying to goad the foreign lenders to convert into a subsidiary and towards this purpose, it has announced various incentives. The RBI said it would offer near national treatment to such wholly owned subsidiaries. They will be permitted to open branches in tier 1 to 6 centres (barring certain sensitive locations) without having the need to take prior permission from the RBI. However, to avail of this facility, the banks will have to open certain number of branches in unbanked rural centres.
The RBI has also said that the subsidiary of foreign banks will also be permitted to acquire domestic private sector banks.
However, this will be considered only after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks.
There were 41 foreign banks operating in India with 322 branches and 1,414 ATMs as of March 2012. Standard Chartered Bank is the biggest player with 94 branches followed by HSBC with 50, Citibank with 43 and Royal Bank of Scotland with 31.