Conversion of an Indian branch of foreign company into subsidiary Indian company.

219(1)

Where a foreign company is engaged in the business of banking in India through its branch situated in India and such branch is converted into a subsidiary Indian company as per the scheme framed by the Reserve Bank of India, then, irrespective of anything contained in this Act and subject to the conditions as notified by the Central Government,—

• (a) the capital gains arising from such conversion shall not be chargeable to tax in the tax year in which such conversion takes place; and
• (b) the provisions of this Act relating to–– (i) treatment of unabsorbed depreciation, set off or carry forward and set off of losses; (ii) tax credit in respect of tax paid on deemed income relating to certain companies; and (iii) computation of income of the foreign company and subsidiary Indian company, shall apply with such exceptions, modifications and adaptations as specified in that notification.

219(2)

In case of failure to comply with any of the conditions specified in the scheme or in the notification issued under sub-section (1), all the provisions of this Act shall apply to the foreign company and the said subsidiary Indian company without any benefit, exemption or relief under the said sub-section.

219(3)

Where, in a tax year, any benefit, exemption or relief has been claimed and granted as per the provisions of sub-section (1) and, subsequently, there is failure to comply with any of the conditions specified in the scheme or in the notification issued under the said sub-section then,—

• (a) such benefit, exemption or relief shall be deemed to have been wrongly allowed;
• (b) the Assessing Officer may, irrespective of anything in this Act, re-compute the total income of the assessee for the said tax year and make the necessary amendment; and
• (c) the provisions of section 287 shall, so far as may be, apply thereto and the period of four years specified in sub-section (8) of that section being reckoned from the end of the tax year in which the failure to comply with the condition referred to in sub-section (1) takes place.

219(4)

Every notification issued under this section shall be laid before each House of Parliament.

Explanation

Section Summary:

This section provides a tax framework for the conversion of an Indian branch of a foreign banking company into a subsidiary Indian company under a scheme approved by the Reserve Bank of India (RBI). It grants tax exemptions on capital gains arising from such conversions and outlines specific tax treatments for unabsorbed depreciation, losses, and other tax-related matters. However, these benefits are conditional and subject to compliance with the scheme and government notifications.

Key Changes:

1. Tax Exemption on Capital Gains: Capital gains arising from the conversion of a foreign bank's Indian branch into a subsidiary Indian company are now exempt from tax in the year of conversion.
2. Conditional Benefits: The tax benefits are contingent on compliance with the RBI scheme and government notifications. Non-compliance results in the withdrawal of these benefits.
3. Recomputation of Income: If conditions are violated after claiming benefits, the Assessing Officer can recompute the income and withdraw the previously granted exemptions or reliefs.

Practical Implications:

1. For Foreign Banks: Foreign banks operating in India through branches can convert into subsidiary Indian companies without incurring immediate capital gains tax liabilities, provided they comply with the RBI scheme and government conditions.
2. Tax Planning: This provision allows foreign banks to restructure their operations in India more efficiently, reducing tax burdens during the transition.
3. Compliance Risks: Failure to meet the conditions of the scheme or notifications can lead to the withdrawal of tax benefits and potential penalties, requiring careful adherence to regulatory requirements.

Critical Concepts:

1. Capital Gains Exemption: The exemption applies only to capital gains arising from the conversion process. Other income and tax liabilities remain unaffected.
2. Unabsorbed Depreciation and Losses: The section allows for the carry-forward and set-off of unabsorbed depreciation and losses, subject to modifications specified in government notifications.
3. Recomputation of Income: If conditions are violated, the Assessing Officer can recompute the income for the relevant tax year, effectively nullifying the previously granted benefits.

Compliance Steps:

1. Adhere to RBI Scheme: Ensure the conversion process follows the RBI-approved scheme.
2. Monitor Government Notifications: Stay updated on any conditions or modifications specified by the Central Government.
3. Maintain Documentation: Keep detailed records of the conversion process, compliance with conditions, and tax filings to avoid disputes.
4. Regular Audits: Conduct internal audits to ensure ongoing compliance with the scheme and notifications.

Examples:

1. Scenario 1: A foreign bank converts its Indian branch into a subsidiary Indian company under the RBI scheme. The conversion results in capital gains of ₹50 crore. Under this section, the ₹50 crore is exempt from tax in the year of conversion, provided the bank complies with all conditions.
2. Scenario 2: The same bank fails to meet a condition specified in the government notification two years after the conversion. The Assessing Officer can recompute the income for the year of conversion, revoke the capital gains exemption, and impose additional taxes on the ₹50 crore.

This section aims to facilitate the restructuring of foreign banks in India while ensuring compliance with regulatory and tax requirements.