Finmin backs RBI on subsidiary model for foreign banks

Written by Surabhi Rastogi | Surabhi | New Delhi | Updated: Jan 29 2011, 05:56am hrs
The finance ministry has come out in support of the central bank's recent proposal to permit expansion of foreign banks in the country through the subsidiary model, as opposed to the current model of expansion through branches. It is also considering allowing capital gains tax waiver for such conversion. We will be taking it up at the earliest and hope to set up norms for starting it soon, a senior finance ministry official said. The norms are expected to exempt such subsidiary firms from capital gains tax as well as allow them expansion in smaller cities of tier 3,4,5 and 6.

A recent discussion paper by the Reserve Bank of India had suggested that foreign banks keen to expand their presence in India should set up a subsidiary as against the current system of setting up branches. It had suggested that the government should incentives foreign banks to operate in India as wholly owned subsidiaries .

As a key incentive and also to soothe concerns over an increase in tax liability, the finance ministry will exempt conversion to a WOS from capital gains tax. There was an issue that such a conversion may result in capital gains. But under section 49 of the Income Tax Act, it is clearly said that this is not taxable for capital gains, the official said. The WOS are also expected to be permitted unrestricted expansion in tier 3, tier 4, tier 5 and tier 6 cities, as was suggested by the RBI paper. We are looking at the issue and will decide soon, the official said. According to RBI, foreign bank subsidiaries would have to seek branch license like regular private and commercial banks if they wish to expand in tier-I and tier-II cities.