Budget 2017 wishlist: Banking

Expectations of banking sector from Budget 2017

Deduction on contribution towards Recognized Provident Fund/Superannuation Fund

The limit of 27% prescribed under Rule 87 of the Income Tax Act in respect of employer’s contribution to a fund should be done away with for entities administering defined benefit schemes of pension, the terms of which are duly approved by the Government and the banks be permitted to contribute full amounts to the pension/superannuation fund as per
the actuarial valuation.

Provide Exemption on Deduction of Tax at Source on Income of Banks

TDS on the income of banks cause considerable inconvenience in view of huge volumes of TDS certificates to be collected by banks for commission received on cross selling etc. Since TDS is only a means of advance collection of tax and banks pay advance tax, it is recommended that banks be granted exemption from TDS under section 196 of the Act.

Provide Exemption on Deduction of Tax at Source on Transfer of Immovable Property

Section 194IA of the Act requires tax to be deducted by a transferee responsible for paying to a resident transferor any consideration (not less than Rs. 50 lakhs) for transfer of immovable property. Exemption need to be provided in cases where transfer is made by banks of properties under the provisions of SARFAESI Act as in such cases the owner is the borrower of the bank and the bank is selling such property to recover its dues.

Further, TDS credit is available on such transaction to the owner of the property and not the bank. Accordingly, bank is receiving the consideration net of TDS.

This results in reducing its recovery to that extent. In the absence of PAN of such borrower/owner of the property, TDS will be applicable @20%, resulting in substantial amount of reduction in recovery to the Bank.

Extend Provisions of Section 43D to ‘Non-Performing Securities’

Section 43D of the Act provides that in the case of a scheduled bank, income by way of interest in relation to prescribed categories of bad or doubtful debts, shall be chargeable to tax in the previous year in which it is credited by the scheduled bank to its profit and loss account; or in which it is actually received by the bank, whichever is earlier. A suitable amendment may be brought into the law to provide that the provision is applicable to non-performing investments as well.

RBI guidelines require interest on non-performing securities to be reckoned as income on realisation basis, whereas for tax purpose it is to be reckoned on accrual basis. The benefit of section 43D may be extended to taxation of nonperforming securities as well which would be in line with RBI guidelines.

Further, Rule 6EA of the Rules provides the criteria for determining the prescribed categories of bad and doubtful debts for the purpose of section 43D, which continues to recognize bad and doubtful debts on the basis of 6 month overdue delinquency norms. Rule 6EA should be amended in line with current RBI guidelines which provide for a period of 90 days of overdue delinquency norms to recognise bad and doubtful debts.

Section 43D of the Act provides for taxation of interest on bad or doubtful debts having regard to the guidelines issued by the RBI in relation to such debts. Rule 6EA has however not kept pace with the changes with RBI guidelines which creates an issue in the assessment of banks.

Period for Maintenance of Special Reserve under Section 36(1)(viii) of the Act

The existing provisions of Section 36(1)(viii) of the Act provide for a deduction to the banking company in respect of any special reserve created and maintained for providing long-term finance for industrial or agricultural development or development of infrastructure facility in India; or for development of housing in India. The deduction is hence available to special reserve “created and maintained” by the taxpayer. Thus, any amount withdrawn from such special reserve is subject to tax as per Section 41(4A) of the Act in the year of withdrawal. Section 41(4A) of the Act seems to have had an un-intended consequence of retaining the amounts in special reserve account in perpetuity, even long after the purpose of granting the loans has been fulfilled. It is recommended that Section 41(4A) of the Act should be suitably amended to specify a period, say 5 years, for retaining the transferred amounts in special reserve as such a period would be adequate to fulfil the purpose of granting long-term finance.

Threshold Limit for Applicability of TDS on Interest

At present, banks are required to deduct TDS @ 10% in case interest payable on deposits exceeds Rs. 10,000 per year. The limit of Rs. 10,000 was fixed in FY 2007-08 and since then tax slabs have been substantially rationalized. Therefore, it is essential that the TDS provisions be also rationalized. It is recommended that the threshold limit for deduction of TDS on interest other than interest on securities be increased from Rs. 10,000 to Rs. 100,000 where the payer is a banking company.
Rule 31(3) requires quarterly issuance of TDS certificates in Form 16A. It is recommended that TDS certificate in Form 16A should be allowed to be issued on annual basis as in the case of Form 16.

Other Suggestions

— Provisions made by banks for bad and doubtful debts and diminution in the value of investments allowed in terms of RBI guidelines should also be allowed as a deduction in computing book profits for the purpose of
section 115JB of the Act.
— Exemption from deduction of tax at source in case of income earned by a person which is exempt by virtue of
Section 10(26) of the Act be specifically provided in the Act.
— Allow annual issuance of TDS certificate (Form 16A) as in case of Form 16.
— As per Section 9(1), if a resident makes an interest payment to a non-resident, the said income will be deemed to accrue or arise in India. As per Section 160 the payer will become a representative assessee for the beneficiary and be liable for all his Indian tax compliances with respect to that income. Since Rupee Denominated Bonds will be listed and traded and there will be a large investor base, the issuer will not be in a position to control the various investors to the bonds. It is recommended that the income in respect of rupee denominated bonds scheme be exempted from the provisions of section 160 of the Act.

Source: Ficci