The past two years have been no less than a roller coaster ride for many industries. The banking industry is considered as backbone of any economy. The asset quality and profitability of banks are mostly impacted by the pandemic. However, enhanced spending on infrastructure, speedy implementation of projects, improved access to banking system, etc. are expected to provide impetus to growth in the banking sector.
While with the ease of restrictions, the economy was reviving and getting back on the growth trajectory, it remains to be seen whether recent spike in Covid cases and modest restrictions (introduced so far) cause any impact on the economy and especially the banking industry.
The economic growth can be accelerated by bringing right set of policies for the banking industry. Towards this, since the Union Budget 2022 is around the corner, the banking industry is looking forward to some positive amendments under the income-tax provisions.
1. Reduction in headline corporate tax rate for foreign companies
Currently, the foreign bank branches are subject to corporate tax at 40 per cent. The Government has reduced headline corporate tax rate for domestic companies from 30 per cent1 to 22 per cent1 starting from financial year 2019-20. This change has widened the gap between the corporate tax rate applicable to foreign companies vis-à-vis domestic companies. In view of this, there is certainly a need to reduce the headline corporate tax rate for foreign companies including bank branches.
2. Conversion of foreign bank branch into wholly owned subsidiary (WOS)
The Government had introduced specific provisions under income-tax law making conversion of foreign bank branch in WOS tax neutral subject to fulfillment of stipulated conditions. On this front, it needs to be ensured that there is smooth transition and continuity of tax affairs from branch to WOS. To elaborate, provision for bad and doubtful debts balance, advance/withholding tax credit and pending tax proceedings/litigation of the branch should be smoothly transitioned to the WOS post conversion.
3. Relaxation of tax deducted at source (TDS)/tax collected at source (TCS) provisions
The Finance Act, 2020 introduced TCS provisions on sale of goods whereas the Finance Act, 2021 introduced TDS provisions on purchase of goods. The term ‘goods’ is not defined under the income-tax law and based on definition provided in other laws, it may include securities and derivatives. While there is clarity regarding listed securities being outside the purview of TDS/TCS provisions, there is no clarity in respect of other securities. Banks as part of their business invest in securities including debt papers and derivative instruments. Such transactions are well-regulated by the RBI and there are in-built reporting requirements. Thus, such transactions should not pose risk of non-disclosure of transactions. A suitable clarification carving out all securities (including derivatives) from the ambit of TDS/TCS provisions relating to purchase/sale of goods would be applauded by the banking industry.
4. Rationalisation of provision for bad and doubtful debts
The income-tax deduction for provision for bad and doubtful debts is allowed to banking industry given its nature of business. Apart from this, as an incentive for promotion of rural banking as it is a socio-economic need of the country, additional income-tax deduction is allowed for rural advances. However, given the challenging business environment and to incentivise the banking industry, there is a case to enhance the limit of income-tax deduction for provision for bad and doubtful debts.
5. Deduction of head office (HO) expenses
There is a cap of 5 per cent of total income for claiming deduction of HO expenses by non-residents having branch in India including foreign bank branches. Given that India has full-fledged transfer pricing rules to determine the arm’s length price of any transactions (including HO expenses) between HO and Indian branch, the policy makers may look at relaxing artificial restriction of 5 per cent cap applicable to HO expenses.
6. Interest on non-performing asset (NPA)
Currently, as per RBI prudential norms, advances are to be considered as NPA where recovery is not received for a period of 90 days or more. However, under the income-tax law, the said period is 180 days i.e., as per erstwhile RBI regulations. This inconsistency between the RBI provisions and income-tax law has resulted in unwarranted litigation whereby tax authorities seek to tax interest on loans classified as NPAs as per RBI norms. There is a need to align income-tax provisions with RBI provisions to avoid further litigation on this issue.
The banking industry is striving to come out of the woods caused by the pandemic. A right set of tax and regulatory policies would bring the banking industry back on speedy growth trajectory. It would be interesting to see the amendments Union Budget 2022 has for the banking industry.
 The income-tax rates mentioned above are excluding applicable surcharge and cess
A version of this article appeared in in CNBC TV18 Online on 14 January 2021