India to incentivise foreign banks to set up subsidiaries

Finance Minister Pranab Mukherjee made the announcement while initiating a debate on his tax proposals for the 2012/13 fiscal year that began on April 1.

"The Reserve Bank of India (RBI) is formulating a scheme for subsidiarisation of Indian branches of foreign banks to ring fence Indian capital and Indian operations from economic shocks external to the Indian economic scenario," he told lawmakers in parliament.

"To support this effort, I propose to provide tax neutrality for such subsidiarisation."

The RBI favours operating foreign banks to expand by opening wholly owned local units rather than opening branches, to shield them from liquidity shocks and capital constraints in their home markets.

However, foreign banks operating in India have cited high stamp duty and capital gains tax as a hindrance to floating local subsidiaries.

Existing laws require overseas lenders to pay up to 30% of the market value of their assets as capital gains and stamp duty while converting branches to a new entity.

The lenders as well as the RBI had requested the government to provide an incentive or a level playing-field to make the subsidiary model viable.