Center could cut taxes on foreign lenders in budget
The government could consider a proposal to offer foreign banks with local branches tax parity with their Indian counterparts, a move that will reduce their tax rates by 15 percentage points to 22%, two government officials said.
âWe are looking into the matter. An announcement to this effect may be mentioned in the next budget, “one of the two officials said, on condition of anonymity. The finance ministry is reviewing a representation made by some foreign lenders, the person said.
Foreign banks pay significantly higher taxes than domestic lenders because corporate tax rate cuts in recent years did not apply to them. While they may be taxed at a lower rate if they convert their activities into subsidiaries, few have chosen to do so, given the operational complexities and regulatory challenges involved.
The banks have asked the government to treat them on an equal footing with Indian banks as they are subject to the same regulations and standards and practice the same method of calculating profits and taxable income.
While domestic banks have opted for a lower than 22% rate option (plus surtax and tax) under tax laws, a similar tax rate option is not available to foreign companies, creating a significant disparity, “said a second official familiar with the development. Branches of foreign banks are taxed at the base rate of 40% plus surcharge and tax.
âThere should be parity of corporate tax rates for branches of foreign companies with domestic companies, in line with the global practice of corporate tax parity,â the official said, adding that all BRIC countries, with the exception of India, and a majority of OECD countries, treat local and foreign entities equally.
A spokesperson for the Ministry of Finance did not respond to a question on the matter.
âThe tax structure in India has broadened the playing field for foreign banks, with a differential of between 12% and 15% or more. So if the government cuts taxes on foreign banks, it will help them consolidate their operations here, âsaid Keyur Shah, partner and head of fiscal financial services, EY India. âThe option for foreign banks is to convert their operations into subsidiary operations so that they are taxed at lower rates. But this presents regulatory challenges and linkages of operational complexity, including changes in lending standards, priority sector lending, etc. “
If the government accepts the proposal, it would go against the policy of the Reserve Bank of India (RBI) to encourage foreign banks to establish wholly owned subsidiaries in the country.
âInstead of establishing tax parity between domestic and foreign banks with branches, a better solution might be to maintain the tax gap between the two while reducing taxes on both. In any case, the government has mandated all banks starting operations after 2010 to create wholly owned subsidiaries. Taxation should therefore promote the idea, but with lower rates everywhere, âsaid Rajesh Gandhi, partner of Deloitte India.
Under applicable tax laws, a branch of a foreign bank in India is considered a foreign company. To create a wholly owned subsidiary for local incorporation, a foreign bank will need to acquire the branch business, requiring the parent company to pay capital gains tax for the transaction.
Currently, there are 46 foreign banks in India, which collectively operate over 300 branches. Foreign banks’ share of total banking system assets is in single digits, according to RBI data, and an expansion of their operations could increase their share to nearly 10%.
Traditionally, foreign banks have focused on trade finance, wealth management, mergers and acquisition advice, in addition to financing large companies that do not need a large branch network. Several foreign banks operate in the country with a single branch and their involvement in retail banking services is limited.
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