India to further liberalise banking industry

The dire need to strengthen its banking industry is not lost on India.

India intends to exempt foreign banks from paying an onerous tax for setting up local units effective the 2012/13 fiscal year that began April 1.

"The Reserve Bank of India is formulating a scheme for subsidiarisation of Indian branches of foreign banks to ring fence Indian capital and Indian operations from economic shocks external to the Indian economic scenario," said Finance Minister Pranab Mukherjee.

"To support this effort, I propose to provide tax neutrality for such subsidiarisation."

His proposal will certainly ignite a debate on his tax proposals in parliament.

Existing laws require overseas lenders to pay up to 30% of the market value of their assets as capital gains and also pay a stamp duty to convert branches into a new entity.

Foreign banks have cited the high stamp duty and the capital gains tax as a hindrance to strengthening their local operations.

RBI, India's central bank, prefers that foreign banks expand by opening wholly owned local units instead of opening branches to shield them from liquidity shocks and capital constraints in their home markets.