An expert said under the new structure, foreign banks’ tax liability might go up if the wholly-owned subsidiary decides to pay a dividend, as such payments will attract dividend distribution tax. Tax liabilities of foreign banks will rise marginally if the Reserve Bank of India (RBI) makes it mandatory for them to conduct their operations in the country through wholly-owned subsidiaries (WOS) rather than a branch model, experts said on Sunday.

“Although the WOS model will provide greater control over the function of foreign banks in the country, the tax liability would rise slightly under the proposed structure,” said Diljeet Titus, a senior partner in law firm Titus and Co.

Titus was referring to an RBI discussion paper on the proposed new norms for permitting foreign banks to enter the country.

In the discussion paper, the RBI had suggested that foreign banks should be incentivized to operate in India as wholly-owned subsidiaries, as against the current system that allows them to have a presence under a branch model. The central bank has invited comments from stakeholders on the concept paper till 7 March.

Expressing a similar view, KPMG head financial services (taxation) Punit Shah said under the new structure, foreign banks’ tax liability might go up if the WOS decides to pay a dividend, as such payments will attract dividend distribution tax (DDT).

As such, foreign banks setting up shop in the country would be discouraged from paying dividends to their shareholders. “From tax angle, it may be better if dividends are not declared as per the current law, as well as the proposed direct tax code (DTC), and the profits are used for expansion,” he said.

A WOS is a company incorporated under the Companies Act, 1956, and is required to follow domestic laws.

“Subsidiary model will be better if the foreign banks focus on growing asset books in India,” said Ernst and Young partner and national leader, financial services, Ashvin Parekh.

Under the current laws, domestic companies attract 30% tax, while the foreign companies have to pay 40%. The domestic companies, however, attract a surcharge, besides other levies, and are also required to pay DDT of 15%.

A shift to a WOS model, Titus said, “Would definitely improve the regulatory control of the RBI over foreign banks, as they would be required to follow the capital adequacy norms and provisions of the Companies Act, 1956.”

The new structure, according to Shah would encourage foreign banks to expand their branch network and redeploy profits within the country.

He further added that flexibility in operations for foreign banks in case of capital infusion and profit repatriation will be reduced in case of WOS, as “they will now come under foreign direct investment (FDI) norms and Companies Act”.

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