I-T issues draft norms allowing foreign banks to convert local branches into wholly owned units

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New Delhi: The income-tax department on Friday issued draft rules allowing foreign banks to convert local branches into wholly-owned subsidiaries without tax obstacles, in line with a Reserve Bank of India (RBI) scheme liberalising foreign ownership in the banking sector.

The draft notification offers capital gains tax exemption and other tax incentives such as carry forward of losses for setting off against future profits, with certain riders.

The draft rules have been issued under a provision incorporated in the Income Tax Act in 2012.

Under the proposed rules, these benefits will be available only if the foreign lender or its nominees hold the entire share capital of the local subsidiary; the assets and liabilities of the local branch immediately before conversion become vested in the newly created subsidiary and the foreign lender does not get any consideration or benefit from the conversion except shares in the subsidiary.

The tax department will accept comments and suggestions until 30 November.

The RBI scheme, announced in November 2013, gives near national treatment to wholly owned subsidiaries of foreign banks for opening branches.

The decision to allow full foreign ownership in the banking sector was a World Trade Organization commitment made by India.

The central bank prefers foreign banks to organize their local operations in the form of a subsidiary rather than as a branch as it will ring-fence their Indian assets and liabilities from the global operations and make regulation easier.