In order to increase the contribution of the NBFC sector to the Indian economy and promote balanced development of the financial sector, CII has recommended to bring parity on taxation of NBFCs with Banks in its Pre-Budget Memorandum to the Ministry of Finance.
''The NBFC sector needs to be provided adequate policy support in the Budget to help meet the financing needs of the economy and also to achieve the financial inclusion agenda. Parity on taxation for the NBFC sector with Banks would create a level playing field and promote balanced development of the Indian financial sector,'' said Chandrajit Banerjee, director general, CII.
NBFCs forms an integral part of the Indian financial system, providing risk diversification to the financial sector thereby playing a complementary role to the banking system.
From being a significant player in financing SMEs, Commercial & Consumer Vehicles, Housing, Construction and other productive sectors of the economy, NBFCs have further diversified themselves to provide Micro Finance, Affordable Housing, Business Correspondent, Agricultural equipment and Infrastructure financing services. Considering the similar nature of services provided by NBFCs vis-à-vis banks, there needs to be convergence of taxation provisions applicable to them, added Banerjee.
Among the key taxation related issues of the NBFC sector brought out by CII in its Pre-Budget Memorandum to the Ministry of Finance were the tax deductibility of provisions for bad and doubtful debts, extension of benefit of special provision prescribing treatment of bad or doubtful debts as taxable income in the hands of banks, and extension of exemption on Tax Deduction at Source (TDS) as applicable to banks.
On these issues, specific CII recommendations to the Ministry of Finance for bringing parity on taxation for NBFCs vis-à-vis Banks in the Budget included:
Tax deductibility of the provisions for bad and doubtful debts
As per the existing provisions of Sec.36(1)(viia) of I T Act, 1961 deduction to the tune of 7.5% / 5% of the gross total income is allowed to any scheduled bank, Public Finance Institutions (PFIs), State Financial Corporations etc. while computing the income under the normal provisions under the head ''Profit & Gains from Business or Profession''.
Although an NBFC is regulated by RBI like all other banks, Financial Institutions, etc. it is not entitled for the aforesaid specific deduction on account of Provisions for Bad and Doubtful Debts as per the existing provisions of Sec. 36(1)(viia) of I T Act, 1961.
In this regard, CII recommended that:
> An NBFC should also be allowed specific deduction to the tune of 7.5% of its gross total income on account of ''Provisions for Bad and Doubtful Debts'' while computing its income under the normal provisions under the head “Profit & Gains from Business or Profession'';
> The aforesaid provision specifically made by debiting the P&L Account of an NBFC should not be taxable while calculating the book profit U/s 115JB of the I T Act,1961;
> The reference to ''Public Financial Institution'' made in Sec. 36(1)(viia) of I T Act, 1961 and the meaning assigned to it as per Sec. 4A of the erstwhile Companies Act, 1956 need to be amended as the new Companies Act, 2013 has already been enacted.
Extension of benefit of special provision prescribing treatment of Bad or Doubtful Debts as taxable income in the hands of Banks, PFIs, etc. to NBFC.
CII recommended that the existing provisions of Sec. 43D of the Act should be made applicable to NBFCs since there main business comprises of giving loans and/or advances like banks and PFIs.
Exemption on Tax Deduction at Source (TDS)
CII pointed out that Section 194A of the Income Tax Act provides for deduction of tax at source (TDS) at the rate of 10% on payment of interest (excluding interest on securities) to a resident. Sub-section 3 of Sec. 194A provides for non-applicability of Sec. 194A in some cases which include banking companies to which Banking Regulation Act applies. However, such exemption has not been extended to NBFCs.
Therefore, CII recommended that since NBFCs are supplementing the banks and these entities are also regulated by the Reserve Bank of India, these NBFCs (including those which have been accorded Public Financial Institution status) should be treated at par with banks and the benefit of 'Nil TDS' should be extended to them as well under Sec. 194A.
Addressing the above major taxation related issues and concerns of the NBFC sector in the Budget would provide them a level playing field vis-à-vis banks and make the growth and development of the sector more robust and sustainable.
