Special provisions regarding conversion of an Indian branch of a foreign company, into a subsidiary Indian company : Clause 219 of the Income Tax Bill, 2025 Vs. Section 115JG of the Income-tax Act, 1961

Clause 219 Conversion of an Indian branch of foreign company into subsidiary Indian company.

Income Tax Bill, 2025

Introduction

Clause 219 of the Income Tax Bill, 2025 introduces special provisions concerning the conversion of an Indian branch of a foreign company, specifically a foreign bank, into a subsidiary Indian company. This legislative measure is pivotal, as it seeks to facilitate the restructuring and localization of foreign banking operations in India, aligning with regulatory imperatives set by the Reserve Bank of India (RBI). The clause provides certain tax concessions and procedural relaxations to foreign companies undertaking such conversions, subject to compliance with notified conditions. This commentary undertakes a detailed analysis of Clause 219, examining its objectives, operative mechanisms, and practical implications. It further undertakes a systematic comparative analysis with the existing Section 115JG of the Income-tax Act, 1961, which governs similar conversions under the extant legal regime. The analysis evaluates the continuity, changes, and potential legal ambiguities arising from the transition to the new statutory framework.

Objective and Purpose

Clause 219, much like its predecessor Section 115JG, is a targeted provision aimed at enabling the smooth conversion of Indian branches of foreign banking companies into Indian subsidiary companies. The legislative intent behind this provision is multifold:

• Facilitation of Regulatory Compliance: The RBI, in its pursuit of a more robust and locally accountable banking system, has encouraged foreign banks to operate in India through wholly-owned subsidiaries rather than branches. The conversion process, however, entails significant legal and tax consequences, particularly with respect to capital gains taxation and the treatment of accumulated losses or unabsorbed depreciation.
• Removal of Tax Impediments: Absent a special provision, such conversions would trigger capital gains tax and potentially disrupt the continuity of tax attributes (e.g., losses, depreciation) accrued by the branch. Clause 219 (and previously Section 115JG) seeks to neutralize these tax consequences, thus removing a major deterrent to such conversions.
• Ensuring Revenue Safeguards: The provision is hedged with conditions, the breach of which would result in the withdrawal of tax benefits and retrospective recomputation of income, thereby safeguarding the revenue's interest.

The policy rationale is thus to encourage foreign banks to localize their operations, enhancing regulatory oversight, while ensuring that tax laws do not become an unintended barrier to such restructuring.

Detailed Analysis of Clause 219 of the Income Tax Bill, 2025

Clause 219 is structured into four sub-clauses, each addressing a distinct aspect of the conversion process and its tax treatment.

1. Tax Neutrality and Conditional Benefits

This Clause 219(1) is the cornerstone of the provision. It stipulates that where a foreign company (engaged in banking business in India through a branch) converts such branch into a subsidiary Indian company pursuant to an RBI-framed scheme, then:

• Capital Gains Exemption: The capital gains arising from such conversion shall not be chargeable to tax in the tax year of conversion. This is a significant concession, as the transfer of assets and liabilities from the branch to the new subsidiary would otherwise constitute a taxable event under capital gains provisions.
• Continuity of Tax Attributes: The provisions relating to unabsorbed depreciation, losses (set-off and carry forward), tax credits, and computation of income for both the foreign company and the new subsidiary will continue to apply, albeit with such exceptions, modifications, and adaptations as may be notified by the Central Government.
• Supremacy Over General Provisions: The sub-Clause operates "irrespective of anything contained in this Act," thus overriding conflicting provisions elsewhere in the Income Tax Act.
• Conditionality: The benefits are available only if the conversion is in accordance with the RBI scheme and the conditions notified by the Central Government are satisfied.

2. Consequences of Non-compliance

This Clause 219(2) provides that in the event of non-compliance with any of the conditions specified in the RBI scheme or the Central Government notification, all benefits under sub-clause (1) are forfeited. The general provisions of the Income Tax Act will then apply to both the foreign company and the subsidiary Indian company, as if the special reliefs had never been available. This is a strict anti-abuse measure designed to ensure that the tax concessions are availed only by bona fide conversions compliant with both regulatory and tax conditions.

3. Retrospective Withdrawal of Benefits

This Clause 219(3) deals with situations where benefits have already been granted (i.e., in a tax year), but subsequent non-compliance with conditions is discovered. It provides that:

• Any exemption or relief availed shall be deemed to have been wrongly allowed.
• The Assessing Officer is empowered to recompute the total income for the relevant tax year and amend the assessment order accordingly, notwithstanding anything in the Act.
• The provisions of Clause 287 (presumably the section dealing with rectification of mistakes or reassessment in the new Code) will apply, with the period of four years for such rectification being reckoned from the end of the tax year in which the failure occurred.

This ensures that the revenue authorities have the power to claw back benefits in cases of post-facto non-compliance, thus deterring misuse.

4. Parliamentary Oversight

This Clause 219(4) mandates that every notification issued under this section must be laid before both Houses of Parliament. This is a standard safeguard to ensure legislative oversight over executive action in framing the conditions and exceptions for availing the benefits.

Practical Implications

Clause 219 has several important practical implications for stakeholders:

• Foreign Banks: The provision provides clarity and certainty regarding the tax implications of conversion, thus facilitating business planning. The capital gains exemption removes a significant financial burden, while the continuity of losses and depreciation ensures that the tax history of the branch is not wiped out.
• Regulators: The provision supports the RBI's policy of encouraging subsidiarization of foreign banks, which is seen as enhancing local accountability and regulatory control.
• Revenue Authorities: The anti-abuse mechanisms ensure that the tax benefits are not misused and that revenue interests are protected through retrospective withdrawal and recomputation powers.
• Compliance Requirements: The provision places a premium on strict compliance with both RBI's scheme and the Central Government's notified conditions. Any lapse can result in the loss of benefits and retrospective tax liability.

Comparative Analysis: Clause 219 vs. Section 115JG

A comparative analysis of Clause 219 and Section 115JG reveals that the former is largely a restatement and continuation of the latter, with some refinements and possible clarifications. The key points of comparison are as follows:

1. Scope and Applicability

Both provisions apply to the conversion of an Indian branch of a foreign company (bank) into a subsidiary Indian company, in accordance with an RBI-framed scheme. The scope thus remains unchanged, targeting only the banking sector and conversions under regulatory supervision.

2. Capital Gains Exemption

Both Clause 219(1)(a) and Section 115JG(1)(i) provide that capital gains arising from the conversion are not chargeable to tax in the year of conversion. The language is substantially similar, with only minor drafting differences ("tax year" in the Bill versus "assessment year relevant to the previous year" in the Act, reflecting the terminology of the new Code).

3. Treatment of Losses, Depreciation, and Tax Credits

Both provisions allow for the carry forward and set-off of unabsorbed depreciation and losses, and the application of tax credits, with exceptions, modifications, and adaptations as notified by the Central Government. The specific reference to "computation of income" for both the foreign company and the Indian subsidiary is also retained in both. A notable point is that the Bill continues the approach of enabling the Central Government to specify, by notification, the manner and extent to which these tax attributes can be transferred or utilized post-conversion. This provides flexibility to address practical complexities.

4. Conditionality and Consequences of Non-Compliance

Both Clause 219(2) and Section 115JG(2) provide that failure to comply with specified conditions results in the withdrawal of all benefits, and the general provisions of the Act apply as if the special reliefs had never existed.

5. Retrospective Withdrawal and Reassessment

Both provisions empower the Assessing Officer to recompute total income and withdraw benefits retrospectively if non-compliance is discovered after the benefit has been claimed and granted. The only material difference is in the cross-referenced section for rectification/amendment powers: Clause 219 refers to Clause 287 (presumably the new Code's equivalent of section 154), while Section 115JG refers to section 154 (rectification of mistakes). The period for rectification remains four years, but is now linked to the "tax year" instead of the "previous year."

6. Parliamentary Oversight

Both provisions require that notifications issued under the section be laid before Parliament, ensuring legislative scrutiny.

7. Drafting and Terminology

The differences between the two are largely in drafting style and terminology, reflecting the modernization and simplification efforts of the new Bill (e.g., "tax year" vs. "previous year/assessment year", "subsidiary Indian company" vs. "Indian subsidiary company"). There is no substantive change in the scope or effect of the provision.

8. Potential for Broader Application

Both provisions are expressly limited to foreign companies engaged in banking. There is no extension to other sectors or types of foreign companies. The Central Government retains the power to specify conditions, but the primary scope remains unchanged.

Interpretational Issues and Ambiguities

While the provisions are generally clear, several interpretational issues may arise:

• Definition of "Conversion": The provision relies on the conversion being "as per the scheme framed by the RBI." The precise contours of what constitutes a valid conversion, and the treatment of partial transfers or restructuring, may require clarification.
• Scope of Notified Conditions: The breadth of the Central Government's notification power means that the actual operation of the provision may vary depending on the conditions imposed. Stakeholders must closely monitor the content of such notifications.
• Treatment of Tax Attributes: The mechanics of transferring unabsorbed losses, depreciation, and tax credits from the branch to the subsidiary can be complex, especially in cases involving cross-border operations, multiple branches, or legacy losses. The notified exceptions and adaptations are crucial in determining the practical outcome.
• Retrospective Withdrawal: The power to retrospectively withdraw benefits raises concerns of finality and certainty for taxpayers. While necessary to prevent abuse, it places a premium on ongoing compliance and may require robust internal controls.
• Interaction with Other Laws: The overriding language ("irrespective of anything contained in this Act") ensures primacy of this provision, but interaction with other regulatory or accounting requirements may still pose challenges.

Practical Considerations for Stakeholders

For foreign banks considering conversion, the following practical considerations are paramount:

• Due Diligence: Comprehensive due diligence is required to ensure that all conditions of the RBI scheme and Central Government notification are met, both at the time of conversion and on an ongoing basis.
• Documentation: Meticulous documentation of the conversion process, asset and liability transfers, and compliance with conditions is essential to defend the claim for tax benefits.
• Monitoring Notifications: As the scope and operation of the provision depend on the conditions notified by the Central Government, stakeholders must monitor and adapt to any changes or clarifications issued.
• Risk Management: Awareness of the potential for retrospective withdrawal of benefits in case of non-compliance is critical. Internal controls and compliance checks should be instituted to mitigate this risk.
• Engagement with Regulators: Proactive engagement with both the RBI and tax authorities can help ensure smooth implementation and address any interpretational uncertainties.

Comparative Perspective: International and Domestic Context

The approach adopted in Clause 219/Section 115JG is consistent with international best practices, where tax-neutral treatment is often accorded to regulatory-driven restructurings, such as the conversion of branches to subsidiaries. The conditionality and anti-abuse safeguards reflect a balanced approach between facilitating business and protecting revenue. Domestically, the provision is unique to the banking sector, reflecting the specific regulatory concerns of the RBI. Other forms of business restructuring (e.g., amalgamations, demergers) are governed by separate provisions, often with their own conditions and tax-neutrality mechanisms.

Conclusion

Clause 219 of the Income Tax Bill, 2025, represents a careful and considered continuation of the policy framework established under Section 115JG of the Income-tax Act, 1961. The provision strikes a balance between facilitating regulatory-mandated restructuring of foreign banks in India and safeguarding the interests of the revenue. By providing tax neutrality, continuity of tax attributes, and robust anti-abuse mechanisms, the law ensures that the conversion of foreign bank branches into Indian subsidiaries is a smooth, fair, and predictable process.

The updated drafting, use of modern terminology, and reference to new procedural provisions reflect the ongoing evolution of Indian tax law towards greater clarity and international alignment. The reliance on notifications provides necessary flexibility, but also underscores the need for timely and clear executive action. As the regulatory landscape and business practices evolve, the provision's enabling structure allows for responsive adaptation, subject to parliamentary oversight.

Going forward, continued vigilance is required to ensure that the relief is not misused, that conditions are reasonable and clear, and that the process remains transparent and predictable for all stakeholders. Judicial clarification may be needed in the event of disputes over the scope of conditions or the operation of the claw-back mechanism, but the legislative intent and structure provide a sound basis for balanced and effective implementation.

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Full Text:

Clause 219 Conversion of an Indian branch of foreign company into subsidiary Indian company.

 

Dated: 6-5-2025