Foreign banks have expressed their concerns on the possible tax liability they would incur if they are to be locally incorporated. Most foreign bankers say it would be a roadblock on the path to converting themselves into wholly-owned subsidiaries and have expressed their concern to the Reserve Bank of India (RBI). Banks are responding to the RBI discussion paper on foreign banks presence in India.
The central bank had on January 21, 2011, in its discussion paper proposed that foreign banks that are systemically important should voluntarily convert into wholly owned subsidiary (WOS). It also proposed relaxation in branch licensing policy, however on the tax front it had asked foreign banks to approach the appropriate authority for suitable clarification.
?This is a industry issue hence individual banks seeking clarity on the tax implications does not seem to be the right approach. This will definitely be a show stopper and a big roadblock. The RBI and the government would have to consider a one time tax liability waiver for the industry,” said the CEO of a foreign bank on the condition of anonymity. Under the current tax rules, a branch of a foreign bank in India is treated as a foreign firm. If a foreign bank chooses to convert into a WOS, it will have to transfer the business of the branches to the WOS, requiring the parent to pay capital gains tax for the transaction.
Despite the proposed relaxation in branch licensing policy some foreign bank chiefs are skeptical of meeting the priority sector limits prescribed by the central bank. To incentivise them to set up or convert into an WOS, the central bank had said it could consider extending, to foreign banks, a branch expansion policy applicable currently to private sector banks.
?We have asked for more clarity on the current branch licensing policy applicable for private sector banks. There is no published ratio on the rural and urban mix of branches in the policy, we have only history to fall back on,? said a foreign bank chief.
The priority sector target of 40% some small foreign banks say is tough to achieve considering their limited reach. “We have hence proposed some relaxation in mandated agricultural lending targets,” he added.
Currently, priority sector limit for foreign banks is pegged at 32% as against 40% target set for domestic banks.
Though RBI has postponed the decision on listing of WOS until the next policy review parents of many foreign banks are not keen on diluting their holding.
A clarity on the listing of WOS is also mandatory as our parents have invested in the business and India is one of fastest growing business for most foreign banks. ,” said the CEO of a foreign bank.
The RBI in its proposed policy has also said that the parent bank may be required to issue a letter of comfort to the central bank, as is required in many jurisdictions today, for meeting the liabilities of the WOS.
