Budget: Hope, trust and aspiration for finance sector

By Sunil Badala

Budget 2019 presented on 5 July 2019 shares the Modi 2.0 government’s vision of India as a five trillion dollar economy to be achieved through “a virtuous cycle of domestic and foreign investment.” The Budget seeks to set out measures to kickstart such a cycle. While infrastructure, rural transformation, education and skill development are chief thrust areas, the financial services sector has received due attention.

A significant tax step is aimed at deposit taking NBFCs and systemically important NBFCs being placed at par with banks and other financial institutions. Essentially, now, their interest incomes from non-performing loans would be taxed on receipt basis rather than on accrual basis. As a corollary and also to penalise the ‘erring’ borrower, deduction for the interest on loan taken would be allowed on payment and not on mere accrual.

Much awaited clarity has emerged on certain tax issues faced by alternate investment funds (AIFs). For example, in category II AIFs, there is now a scheme for pass through of non-business losses to investors. Further, there is also exemption from application of fair valuation principles for issue of shares by the venture capital undertaking to Category II AIFs. Such clarity reposes the faith of the investor community and helps improve market sentiment.

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The concept of international financial services sector (IFSC) seeks to catapult India as a global financial services destination. To improve the international ranking of the Gandhinagar based GIFT city and possibly to also promote more IFSCs, the government has revitalised several tax incentives available to the IFSC. For example, now, there are regulatory/ tax incentives in the IFSCs such as for foreign reinsurers and for investors in mutual funds and AIFs, subject to applicable conditions.

There are several tax measures to go from less cash to an almost cashless economy including a 2 percent tax deduction (TDS) from cash withdrawals exceeding Rs. 1 crore from a bank account. Tax information reporting mechanisms (including especially AIR) are being tightened to provide insights to the administration to track tax evasion. An important policy measure also relates to merchant discount rate charges on digital payments that banks impose on merchants which often get passed on to customers. Henceforth, these charges will have to be forgone by the banks in cases where the annual turnover in business exceeds Rs. 50 crore. The loss will have to be absorbed by the banks and the Reserve Bank of India (RBI).

On the policy and regulatory front, the big announcement is the government’s Rs. 70,000 crore capital infusion package for PSU banks. This infusion should help much-needed funding for such banks to address improvement in technology and service offerings. The RBI is expected to tighten its regulatory authority over NBFCs and also cover housing finance companies, hitherto regulated by the National Housing Bank.

There are major foreign investment-related announcements. The possibility of allowing 100 per cent FDI in insurance, aviation and media sectors as against current levels would be examined through consultation. Further, the FPI investment limit is being increased from 24 per cent to the maximum foreign investment limit based on sectoral cap. Interestingly, the corporates in question may be given an option to lower the limit. The extant provisions of the Portfolio Investment Scheme for NRIs are expected to be merged with the FPI route, this is expected to increase access for NRI to the Indian markets. Ease of KYC norms for FPIs are underway – this should allay the many challenges faced by FPIs on this front.

There is a proposal to increase minimum public shareholding in listed companies from the current level of 25 per cent to 35 per cent. Further, to promote public funding of social causes, there is a new concept of social enterprises or voluntary organisations being able to raise capital through social stock exchanges.

There are measures aimed at ease and simplification – some pressing examples would include: interchangeability of PAN and Aadhar, Aadhar on arrival for NRIs, a merger of multiple labour laws into 4 Labour Codes, availability of pre-filled tax returns, faceless tax assessments. There are several such measures in GST as well. Taxpayer/ citizen convenience aside, these moves would also lessen the burden on the administration.

All in all, this Budget has packed in positive measures on diverse areas – especially, the tax incentive for priority areas, ease of business for the taxpayer, simplification while continuing to tighten the compliance and reduce avenues for leakage. With the new Direct Taxes Code also expected to be released shortly, it would be interesting to see what lies in store in the Code.

(The author of this article is the National Leader of Financial Services Tax in KPMG in India)