Conversion of an Indian branch of foreign company into subsidiary Indian company
[Section-219 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 219(1) of Income Tax Act 2025
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,—
- 219(1)(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
- 219(1)(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.
Section 219(2) of Income Tax Act 2025
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.
Section 219(3) of Income Tax Act 2025
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.
Section 219(4) of Income Tax Act 2025
219(4) Every notification issued under this section shall be laid before each House of Parliament.
FAQs on Section 219 of Income Tax Act 2025
What is the scope of Section 219 of the Income Tax Act, 2025?
Section 219 deals with the tax implications of converting an Indian branch of a foreign banking company into a subsidiary Indian company, in accordance with a scheme framed by the Reserve Bank of India.
Does the conversion of a branch into a subsidiary Indian company attract capital gains tax?
No, as per Section 219(1)(a), the capital gains arising from such conversion are not chargeable to tax in the tax year in which the conversion takes place, provided the conditions notified by the Central Government are fulfilled.
What happens to unabsorbed depreciation and losses after the conversion?
According to Section 219(1)(b)(i), the provisions related to treatment of unabsorbed depreciation and set off or carry forward of losses shall apply with modifications as specified in the notification issued by the Central Government.
Will the foreign company or the Indian subsidiary lose any tax benefits after conversion?
If all notified conditions are met, the entities continue to receive benefits such as tax-neutral conversion and specific treatment under income computation provisions. However, if conditions are not complied with, the benefits will be revoked.
Can the tax credit for deemed income be carried forward after conversion?
Yes, Section 219(1)(b)(ii) allows for tax credit in respect of tax paid on deemed income to be carried forward, subject to modifications mentioned in the government’s notification.
Is there any impact on the computation of income for the foreign company or the subsidiary Indian company?
Yes, as per Section 219(1)(b)(iii), computation of income shall follow provisions of the Act with specified exceptions and adaptations per the notification.
What are the consequences of non-compliance with the scheme or notified conditions?
Under Section 219(2), if the specified conditions are not complied with, all the benefits, exemptions, or reliefs under Section 219(1) will not apply. The provisions of the Act will apply in full to both the foreign company and the Indian subsidiary.
What happens if the conditions are violated after the benefits have already been claimed?
As per Section 219(3), the benefits are deemed to have been wrongly allowed. The Assessing Officer may recompute the total income and amend the assessment accordingly. Section 287 will apply to such reassessments, and the limitation period will be reckoned from the end of the year in which the condition was violated.
Are notifications under Section 219 publicly disclosed?
Yes, every notification issued under Section 219 must be laid before each House of Parliament as mandated by Section 219(4).
