Foreign banks get a breather on income-tax

Foreign banks will now pay a flat 35 per cent corporate tax plus 2.5 per cent surcharge following the Income-Tax Appellate Tribunal order.

The ITAT stated that the department cannot levy tax on a foreign company at a rate higher than that applicable to a similarly placed Indian entity.

Indian companies pay a flat 35 per cent corporate tax plus 2.5 per cent surcharge, while foreign firms are taxed at 40 per cent plus 2.5 per cent surcharge, if not registered under the Indian Companies Act.

This assumes significance in light of the recent government notification that allows foreign banks to convert their branch licences into wholly-owned subsidiaries.

Foreign banks have yet to decide on which route to adopt as they await issuance of detailed guidelines by the Reserve Bank of India on setting up wholly-owned subsidiaries. One of the key advantages the subsidiary route offered foreign banks was the lower tax rate.

As a subsidiary, foreign banks will be charged a base tax rate of 35 per cent plus a 2.5 per cent surcharge, effectively paying corporate tax at 35.87 per cent. At the same time, they would however, pay a dividend tax at the rate of 12.81 per cent.

Currently foreign banks are taxed at the rate of 40 per cent plus 2.5 per cent surcharge, paying an effective rate of 41 per cent.

As such there is no further tax on remittance of profits. Many foreign banks see the subsidiary route as a better choice of operating in the Indian market given the freedom they stand to gain in terms of opening up branches.

Many Citibank and Standard Chartered Bank are keen to expand their footprint in the country in order to grow their market share.

At the same time, they feel threatened by the way new generation private banks are spreading their network. Recently IDBI Bank announced its plans to set up an additional 28 branches in the country, taking its total network to more than 110 branches.

The subsidiary route proves to be an easier path for foreign entities yet to establish their presence in the country. Foreign banks corporatised as domestic companies will get the advantage of setting up as wide a branch network as they wish, and make available capital without having to restrict the size of their operations in the country.