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TMI BlogSpecial 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, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... ctical 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 continui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ins ..... X X X X Extracts X X X X X X X X Extracts X X X X
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