No Capital Gain on Conversion of Indian Branch of Foreign Bank into Indian Subsidiary Company

The provisions of Income Tax Act, 1961 (ITA) were amended in 2012 to provide for Capital Gains tax exemption in case of conversion of an Indian Branch Office (BO) of a Foreign Company engaged in the banking business (Foreign Bank) in India into a Subsidiary Company (WOS), in accordance with a scheme framed by the Reserve Bank of India (RBI). Further, the Central Government was required to notify the conditions which may be required to be satisfied to claim the Capital Gain tax exemption and for application of transitory provisions on conversion. The Central Board of Direct Taxes (CBDT) had issued a draft notification on 17 November 2017 seeking comments from public for the conditions to be stipulated for such conversion to be tax neutral. Based on the feedback received from various stakeholders, the central government has now issued two final notifications on this subject. Notification 85/2018 dated 6 December 2018 provides guidance on two aspects: Part A: Conditions to be met to avail Capital Gains tax exemption on conversion of the BO of a Foreign Bank into a WOS.

• Amalgamation of BO with WOS should be approved by shareholders of foreign bank and WOS, and be sanctioned by RBI under paragraph 20(h) of the Framework;
• All assets and liabilities of the BO should become assets and liabilities of WOS at values appearing in the books of accounts of BO before conversion (any change in the value of the assets consequent to revaluation shall be ignored);
• Foreign bank or its nominee should hold the entire share capital of WOS during the year of conversion and shall hold 51% of voting power for a period of 5 years succeeding the said year;
• Foreign bank should not receive any consideration/benefit directly or indirectly other than the allotment of shares of the Indian WOS;
• Receipt of shares of WOS on conversion should not attract provisions of section 56(2)(x) of ITA (Income from other sources).

Part B: Exceptions, modifications, and adaptations with regards to applicability of various provisions of the ITA on conversion of the BO of the Foreign Bank into a WOS.

• The accumulated loss, unabsorbed depreciation and tax credit of BO shall be deemed to be accumulated loss, unabsorbed depreciation and tax credit of WOS as if the conversion had not taken place;
• Depreciation amount for WOS and branch, should not exceed the deduction calculated as per prescribed rates under ITA, as if the conversion had not taken place and such deduction shall be apportioned between branch and WOS in ratio of number of days the asset was used by each;
• The actual cost of the block of the asset for the WOS should be the written down value of the block of assets in the hands of the branch as on the conversion date;
• Where a 100% deduction is claimed for capital assets in the hands of BO, nil value should be considered in the hands of WOS;
• The cost of acquisition of capital assets in WOS shall be the cost of acquisition for the branch;
• Credit balance of provision of bad and doubtful debts under the provisions of ITA in the hands of BO shall be deemed to be a credit balance of WOS;
• Amortization of expenditure incurred under the voluntary retirement scheme shall apply to WOS, as they would have applied to the branch as if the conversion had not taken place.

Notification 86/2018 dated 6 December 2018 provides method for determination of the period of holding of Capital Asset transferred by BO of a Foreign Bank in India into a WOS: The period of holding of the Capital Asset, which became the property of the WOS as a result of conversion of the BO, shall include the period for which the Capital Asset was held by such BO and by the previous owner (if any) who has acquired the Capital Asset by mode of acquisition referred to in Section 49(1) or Section 115JG(1) of the ITA. No Tax Deducted at Source (TDS) under Section 194A of the ITA for income up to INR 50,000 in the case of Senior Citizens: CBDT Clarification Notification no. 6/2018, dated 6 December 2018: It has been brought to the notice of CBDT that in case of Senior Citizens, some TDS Deductors / Banks are deducting TDS even in case the amount of income does not exceed fifty thousand rupees. Therefore, CBDT has clarified that in the case of senior citizens, no TDS is required to be deducted under Section 194A of the ITA, where the amount of such income during the financial year does not exceed INR 50,000/- in aggregate. Contact us to know more. Last Updated: 15th January 2019 This article is contributed by: Divya Bhatia Senior Manager, Direct Tax  

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