The Reserve Bank of India (RBI) on Tuesday tried to ease the process of foreign banks converting into wholly-owned subsidiaries from the current branch-based model by clarifying that they are exempt from paying capital gains tax and stamp duty when they do so.

The central bank drew attention to two clauses under the Income Tax Act, 1961, and the Indian Stamps Act, 1899, which exempt foreign banks from these levies should they chose to convert to the wholly-owned subsidiary (WoS) model, preferred by the central bank.

?In this context it may be indicated that government has inserted, by the Finance Act, 2012, a new Chapter XII-BB titled ?Special Provisions relating to Conversion of Indian Branch of a Foreign Bank into a Subsidiary Company? in Income Tax Act, 1961, inter alia, exempting capital gains arising from such conversion from capital gains tax, with effect from April 1, 2013,? the central bank said.

Consultants said this removes a big impediment and would make it easier for foreign banks to decide to shift to the subsidiary-based model.

?The main issues have been addressed. Now what matters is the country strategy of these banks, the kind of trade-off they need to make for immediate and future decisions and whether they understand the new emerging challenges in India,” said Robin Roy, associate director, financial services, PwC.

Foreign banks such as Citibank, Standard Chartered, HSBC and others, however, declined to comment on whether these clarifications would persuade them to move to the subsidiary model.

The RBI has been pushing foreign banks to convert into subsidiaries to elicit a deeper financial commitment from them, but also ring-fence domestic operations from their often complex global operations.

So far, all foreign banks have followed a branch-based model wherein they acquire branch licences and set up shop in the country. Earlier this month, the RBI had released guidelines for subsidiarisation of foreign bank branches.

In the guidelines, foreign banks setting up subsidiaries were offered “near national” treatment, allowing them to open branches across the country without restrictions. However, the RBI said it will cap the entry of subsidiaries of foreign banks once the capital and reserves of the bank exceeds 20% of the banking system.

RBI has also stated that foreign banks which convert to the subsidiary model of banking would be allowed to expand more easily via mergers and acquisitions as well.

“The regulator has made all necessary concessions for foreign banks to go for the subsidiarisation model voluntarily. RBI has made it less expensive for foreign banks to convert, given near-national treatment and also made branch licensing norms more liberal. We will have to see what reasons foreign banks bring up for not taking it up,? said Ashvin Parekh, national leader, global financial services, Ernst & Young.

Foreign lenders had said that they would wait for more clarity on the tax front once the guidelines were issued. Interestingly, while it was expected that foreign banks would embrace the subsidiary model, most banks have not shown much interest so far.

?Even after this, if the foreign banks do not get the message, then the RBI may have to make it compulsory after 6-12 months,” Parekh said.