Budget 2018: Expectations of the Financial Services Sector

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With the Budget almost around the corner and India poised at a critical juncture following demonetisation and the introduction of Goods and Services Tax (GST), the expectations of the industry are towards a growth oriented and forward looking budget.

The Financial Services Industry has been probably one of the most impacted by recent Government initiatives and therefore the expectation that some sops come its way is not unexpected. Below are some of the key asks and expectations of the industry broken up into various sectors.

Banks and Non-Banking Finance Companies

Banks have taken a big hit on account of the large provisions that they have taken for provisions in their books for Non-Performing Assets (NPA). The Insolvency and Bankruptcy Code (IBC) may also need financial institutions to make higher provisions in cases where its provisions have kicked in or may kick in.

The present provisions in the Income-tax Act, 1961 (the Act) do allow a deduction for a write off of a bad debt but have a restriction of (7.5 percent of the ‘adjusted total income plus 10 percent of aggregate rural advances) for a provision for doubtful debts.

NBFCs were also allowed a deduction for the provision of up to five percent of their total income from the financial year 2017-18. With the requirement of making a provision for NPAs becoming stringent and write off possibly not possible in all cases, the Banks and NBFCs would want the Finance Minister (FM) to allow them some greater leeway in terms of claiming a higher deduction of the provision for bad and doubtful debts.

One challenge could possibly be that the need for the deduction is more acute in the current year as opposed to going forward. The reluctance to amend the provisions of the Act with retrospective or retroactive effect may possibly be less liked by the industry even though possibly, an enhanced deduction would generally be welcomed.

Minimum Alternative Tax (MAT) based on book profit as opposed to taxable income is another area which has been a subject matter of representation for taxpayers in general and institutions where the IBC has been pressed into service, in particular.

Last month’s Press Release on allowance of brought forward losses (including depreciation) or set off against book profits for companies which have been subject to IBC proceedings has been welcomed  as one more of a series of swift steps taken to ease some of the pains that taxpayers face.

A request to replace MAT with an income based Alternate Minimum tax (AMT) similar to what presently exists for non-corporates has been mooted. Taxpayers will wait with bated breath for any developments in this area, particularly given the FM’s statement that MAT will not be abolished.

Asset Managers and Capital Market Participants (including foreign investors)

The news that long term capital gains tax may be brought back and a possibility of extension of the period of holding for listed securities to be increased from one year to two years for classifying listed securities as long term, has been doing the rounds which asset managers are hoping will not happen.

Currently listed securities need to be held for one year, unlisted securities and land and building need to be held for two years and other assets, for three years (debt instruments fall here) to be classified as long term capital assets.

Maybe a rationalization and a uniform period to be prescribed for all assets may find better favor with the industry and investors putting money into the capital markets but certainly a long term capital gains tax on sale of listed securities is possibly not likely to go down well.

Again, expectation appears to be for this not happening and the attendant expectation is that in the imposition of the tax may lead to the markets reacting strongly which may possibly not be a desired outcome.

Foreign Investors, despite upheaval in the recent past on how they would be taxed on transfer of Indian assets (including GAAR and Indirect Transfers and Treaty amendments and above all, the signing of the Multilateral Instrument (MLI) by India last year) have continued to remain bullish on India (and its capital market) and probably rightly so, given India’s growth potential and the global economic outlook.

Their expectation of a prescriptive GAAR law, further clarity on indirect transfer and also clear direction from the tax authorities in India on how the MLI will take effect will be on their high priority list. Also up there will be a restriction on deduction (section 94B of the Act or loosely, ‘thin capitalization provisions’) of interest paid by their Indian Associated Enterprise(s) in the hands of these AEs which at the very least ought to exclude interest paid by an Indian NBFC AE to its overseas AE.

On the debt investment front, clarity that the 5 percent withholding tax would continue to apply even after 30 June 2020 would be welcomed.

A unit based taxation of investors in Category III Alternative Investment Funds (similar to what exists for Mutual Funds at present) has been requested for by the SEBI IPAC Committee. Due consideration to this proposal would gladden the Alternative Investment Funds market participants.

Mutual Funds amongst other issues would probably welcome inclusion of investment in infra debt focused schemes to qualify as eligible investments for claim of deduction under section %$EC oif the Act (where long term capital gains may be invested without paying tax). The enhancement of the Rs. 50 lakh limit or a separate limit for these schemes would also add to their delight if this does indeed happen.

Insurance

The Insurance industry has a number of asks from the Government. In the absence of social security, life insurance plays a very important role in a growing economy like ours. A case for a separate sub limit for deduction under section 80 C of the Act for insurance premium has been made out. On hopes the Government takes note of this.

For non-life insurers, also, the limit for health insurance premium has been on the lower side. With costs of medical treatment steadily going up, there is a case for revisiting the limit of deduction under section 80D of the Act.

International Financial Services Center

India’s first International Financial Services Center at GIFT city is now operational. Although activity therein has picked up manifold since the commencement of its operations a couple of years ago, there is a distance to traverse before it can consider competing with Global Financial Centers.

In fact it is thought that the exchanges set up by the BSE and NSE in the IFSC can probably be the site of action for derivative transactions referencing Indian indices and which will shortly, as understood, start referencing single Indian company stocks, which are presently being done on the SGX and other international exchanges if tax on derivative transactions (presently these are taxable at full rates) on these exchanges is zeroised.

SGX’s commencement of offering of derivatives on single Indian stock futures beginning next month could probably see some volume being diverted there instead of on the BSE and NSE on account of the difference in the tax cost. AIFs set up in the IFSC ofr fund managers located in the IFSC could also possibly be subject to lesser compliance conditions in order to encourage building of a new eco system in the IFSC.moneycontrol