CII Recommends Parity on Taxation of NBFCs with Banks in the Budget

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 Mr 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 Mr 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:

(1)    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)(vii a) of I T Act, 1961.

In this regard, CII recommended that:

1. 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”;
2. 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;
3. 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.

(2)    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.

(3)    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.

‘Make in India’, ‘Skill India’ and ‘Digital India’ to enable MSMEs attain Exponential Growth: Madhav Lal, Secretary, Ministry of MSME

CII in Partnership with the Ministry of MSME, Government of India organized the Global SME Business Summit 2014. The day one of the event focused on connecting Global SMEs for mutual business development and explore emerging markets. During the event, Mr Madhav Lal, Secretary, Ministry of MSME, discussed the intent of the Government of India and the Ministry of MSME to lead Indian MSMEs on a high growth path. After highlighting the role played by MSMEs in the economic landscape of the country, he spoke about the dual role that the Ministry of MSME plays in assisting MSMEs in terms of providing them with a supportive framework through policy advocacy and by bringing about institutional reforms in areas of policy vacuum including taxation reform, regulatory systems’ reforms, finance provisioning reforms, etc. He shed some light on the recent initiatives of the Prime Minister of India, Mr. Narendra Modi, for support to MSMEs. The most significant measures include the Make in India initiative, Skill India for skill development, Digital India for ICT interventions, etc. He also made a mention of the announcements in the Union Budget 2014-15 for the provision of a Rs 10,000 crore venture capital fund and a Rs 200 crore technology centres fund, accreditation of enterprises in this sector, virtual clusters, online filing of EM I and II, incubation centres, etc. These initiatives make it clear that the government is focused on supporting the MSMEs. He illustrated the need for identifying important verticals within this sector with differing interests with regards to government’s policy interventions and highlighted the merits of adopting a focused approach to benefit these verticals. Mr Madhav Lal inaugurated the 11^th edition of Global SME Business Summit 2014 today in New Delhi.

Mr R C Bhargava, Chairman, Maruti Suzuki India Limited in his Keynote Address, disclosed the role played by MSMEs in assisting Maruti Suzuki in its journey to become the biggest car manufacturing company. He spoke about the diversity of opportunities evolving in the auto components sector for MSMEs. He discussed the role played by Maruti in cluster development, skill formation, etc. He also added that, to make the PM’s call to grow manufacturing a reality different rules and incentives need to be devised for MSME’s working as vendors to modern manufacturing. A capital investment based criteria is inappropriate and in fact creates a disincentive to improving technology, productivity, quality and reducing costs. He said that industry will not become competitive if this persists. This applies not only to auto but aerospace, capital goods, power generating and transmission equipment, consumer durables and so on. The entire package of incentives should lead to enhancing competitiveness of manufacturing, and upgrade of all aspects of their work, commented Mr Bhargava.

The report “The New Wave Indian MSME: An Action Agenda for Growth” was released by Mr Madhav Lal at the Session.

The report “The New Wave Indian MSME: An Action Agenda for Growth” was released by Mr Madhav Lal at the Session. This report suggests an alternative framework for the definition of MSMEs. This report outlines relevant recommendations for an opportunity framework built around five growth enabling pillars comprising: infrastructure, regulatory framework, funding, performance incentives and skill India. It also contains global best practises and is in line with the government’s vision of policy incentives for the MSME sector in India.

Ms Patricia Hewitt, Chair, UK India Business Council, emphasized on building a healthy India UK SME partnership. She explained that through improvements in factors like gaining access to networks and contacts; establishing a dialogue and building a relationship with actors in the market; navigating unfamiliar business environments, including differences in language and culture; procedural barriers such as product standards and other aspects of the legal and regulatory framework; assessing the competitive environment and identifying potential opportunities and risks; etc., the small and medium enterprises of both countries can be enabled to explore and expand their businesses in each other’s domain.

Mr T T Ashok, Co-Chairman, CII National SME Council, shared about the various features of the session which include 8 sectoral sessions on emerging sectors with relevance for SME penetration and internalization, 6 country sessions to explore cross-border partnership opportunities of mutual benefit, the India SME expo showcasing 50 national as well as international SMEs, their products and services and a special National Vendor Development Program with leading CPSEs in India to enable Public Sector Enterprises to identify suitable vendors in the MSE category and to provide SMEs with an opportunity to interact with these CPSEs and cement long term partnerships. He added that looking ahead, the challenge lies in building the next generation of SMEs that will collectively function as the powerhouse of the global economy. To achieve this, governments and industry around the world would need to make many collaborative efforts to create conducive eco-systems for MSMEs within their respective geographies and across regions.