Centre may lower tax for foreign lenders in budget

NEW DELHI: The government may 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 as much as 15 percentage points to 22%, two government officials said.

“We are examining the issue. An announcement to this effect can find mention in the upcoming budget,” one of the two officials said, requesting anonymity. The finance ministry is looking at a representation made by some foreign lenders, the person said.

Foreign banks pay significantly higher taxes than domestic lenders as corporate tax rate cuts in the past years did not apply to them. While they can be taxed at a lower rate if they convert their operations into subsidiaries, few have chosen to do so, given the operational complexities and regulatory challenges involved.

The banks asked the government to treat them on a par with Indian banks as they are subject to the same regulations and norms and practise the same method for computation of profits and taxable income.

“While domestic banks have opted for a lower rate option at 22% (plus surcharge and cess) under the tax laws, a similar tax rate option is not available to foreign companies, creating significant disparity,” said a second official aware of the development. Branches of foreign banks are taxed at the base rate of 40% plus surcharge and cess.

“There should be parity in corporate tax rates for branches of foreign companies with domestic companies, in line with global practice of corporate tax parity,” the official said, adding that all BRIC countries, except India, and a majority of OECD countries, treat local and foreign entities equally. A spokesperson for the finance ministry did not respond to a query on the issue.

“The tax structure in India has widened the level playing field for foreign banks, with differential ranging between 12-15% or more. So if the government lowers the taxes for foreign banks, it will help them consolidate their operations here,” said Keyur Shah, partner and tax financial services leader, EY India. “The option for overseas banks is to convert their operations into subsidiary operations to get taxed at lower rates. But that has regulatory challenges and operational complexity ties including bringing changes in lending norms, priority sector lending, etc.”

FOREIGN BANKS PAY HIGHER TAXES THAN DOMESTIC LENDERS AS CORPORATE TAX RATE CUTS DID NOT APPLY TO THEM