Budget 2021 expectations: Putting Financial Service Sector back on track
  • Sunil Badala, Partner |

The pandemic has thrown many traditional fiscal management measures to the wind and challenged the regulators to the hilt. Our Finance Minister (FM) has sought to walk the tight rope between managing the economy and peoples’ expectations. Now everyone is waiting to see what more the FM can do for us in the upcoming budget as the largest democratic country looks to recover from the disruption caused to the economy by the pandemic.

The big concern is the contraction in GDP. It is expected that the GDP will contract at approx. 7.7 per cent in financial year 2020-21 . The Government is expected to take some crucial steps to kick-start the economy and bring the demand back to pre-COVID-19 levels.

The Financial Sector, being the backbone of the economy, would be one of the focus areas in the overall scheme of bringing back the demand and boosting the economy. In a series of blogs, we would be covering key expectations from the budget relating to the Financial Sector. Some of the suggestions which the FM could consider, pertain to improving liquidity and performance of the banking and Non-Banking Finance Company (NBFC) sector.

Banking and Non-Banking Finance Company

Increased limit for deduction of provision for doubtful debts

Given the current pandemic, business transactions have been significantly impacted. Many transactions are being postponed or cancelled, or they are occurring in significantly lower volumes than initially forecasted. With this, the Banking and NBFC sectors are bracing for increased delinquencies resulting in cash flow problems and profitability taking a hit. This shall potentially lead to significant increase in the provisions for bad and doubtful debt and actual bad debts.

Considering the potential outlook, one-time accelerated deduction on account of provision for doubtful debts for Banks and NBFCs would be a much required relief.

Exemption from TDS on interest income earned by NBFCs under Section 194A of the Act

TDS on interest earned by Banks is not applicable under section 194A. Tax on the income earned by such banking units are paid in the form of ‘advance-tax’, ensuring no revenue loss to the Government. As nature of lending business for Banking units and NBFC’s are almost similar, such TDS exemption should be made applicable to NBFCs as well, by notifying them under the recently introduced provisions of section 194A(5) of the Act.

This will help NBFCs to manage the liquidity crisis, especially in the current times when their profitability is severely impacted on account of Covid-19 lockdown and they are not getting the benefit of moratorium from Banks while they are required to extend the benefit of moratorium to their borrowers. This will also significantly reduce the compliance burden on the NBFCs and their customers, while ensuring no revenue loss to the Government.

Rationalisation of tax rate for branch of Foreign Bank in India

Whilst the method of computation of business profits for domestic bank vis-à-vis the branch of a foreign bank in India is largely identical, however, branch of a foreign bank is subjected to tax at 40 per cent vis-à-vis the concessional rate available for a domestic bank. Moreover, Finance Act, 2020 abolished the dividend distribution tax which has led to a further discrimination. Therefore, the difference is significant now. Foreign banks also play critical role in lending in the economy, therefore, it would be appropriate to reduce the tax rate applicable to a branch of foreign bank in India and bring them on par, thereby creating a level playing field for foreign banks operating in India by way of a branch.

Thin capitalization

To source money for onward lending, NBFCs may need to borrow and for this, foreign owned and controlled NBFCs largely resort to global parents for direct borrowings, guarantees, etc. The cap on the interest expenses in such cases is harsh. Banks are exempted from these thin capitalization norms. As NBFCs also play a crucial role there is an immediate need to extend the exemption to NBFCs from thin capitalization norms.