Budget 2020 can make or break the economy: Deloitte

By Russell Gaitonde

The upcoming Union Budget 2020-21 has the potential of being a “make or break” for the Indian economy, which has been slowing down since the last fiscal year. Given the current economic situation, the Budget announcements will focus on restoring the health of India’s financial services sector, with a slew of policy and tax measures targeted at getting the economy back on track. Some key Budget expectations of the financial services industry are listed below.

Banking and capital markets

Although the consolidation of public-sector banks is a step in the right direction, the government should introduce policy measures to address the governance, management, and operational issues faced by public-sector banks.

To allay the difficulties in recovering non-performing assets (NPAs), the government should allow banks to claim 100 percent tax deduction for bad and doubtful debt provisions, in line with RBI guidelines.

The recent reduction in corporate tax rates for domestic companies (including Indian banks) is a welcome move. However, this relaxation has resulted in placing the Indian branches of foreign banks at a comparative disadvantage. Hence, corporate tax rates for Indian branches of foreign banks should also be brought on par with the tax rates applicable to Indian banks. Alternatively, a tax on profits remitted out of India could be introduced to bring parity in the effective tax rates that apply to Indian banks and Indian branches of foreign banks.

The government should streamline the thin capitalisation provisions to ensure that Indian branches of foreign banks are not at a competitive disadvantage vis-à-vis Indian banks while lending to their Indian clients.

The government should remove the current limit of 5 percent of the adjusted total income, to claim tax deduction for Head Office executive and general administrative expenses. This relaxation could go a long way in reducing existing tax litigation on the subject and provide tax certainty to foreign companies with a presence in India.

Additional relaxations and concessions are required to the scheme announced by the government according tax neutrality to conversion of an Indian branch of a foreign bank into an Indian subsidiary. These relaxations could include tax deduction for expenses incurred on conversion and non-applicability of transfer pricing provisions. This provides flexibility to foreign banking groups to replicate the capital structure they use for their Indian bank branches, without affecting tax neutrality, etc.

The government should extend additional funding sources (i.e., special refinancing windows) to NBFCs to reduce overdependence on banks and address the current liquidity crunch.

Various ambiguities and practical challenges (including lack of clarity on accounting issues) have thus far restricted banks to extend credit to NBFCs under the recently announced partial credit guarantee scheme. With zero disbursements from the sanctioned limit of INR 40,000 crore, the government should address the issues and provide requisite clarifications to make this scheme a workable proposition for banks and NBFCs.

Considering the special nature of businesses undertaken by NBFCs and keeping in mind the important role played by them in the financial services space, all categories of NBFCs should be exempted from thin capitalisation, and brought on par with banks and insurance companies. This is particularly important to foreign-owned NBFCs, because they rely on their parents for funding.

NBFCs following IND-AS accounting policies are required to recognise interest income on NPAs in their profit and loss account. Hence, to enable them to claim benefits of section 43D of the IT Act, these companies should be allowed to offer interest income on NPAs on a receipt basis.

The government should extend exemption provided in section 194A of the IT Act (available to banks) to NBFCs and HFCs. At present, interest payments by domestic borrowers to NBFCs and HFCs face a 10 percent withholding tax.

To boost foreign investments and deepen the Indian debt market, the sunset clause under sections 194LC and 194LD of the IT Act can be extended to perpetuity. Further, existing 5 percent tax concession can be extended to interest earned on INR denominated external commercial borrowings (ECBs).

The government should exempt long-term capital gains on sale of Indian-listed equity shares. Alternatively, it should grant the aforesaid tax exemption to investors who have held the securities for more than two years.

Clarification is required on grandfathering provisions introduced after the withdrawal of the longterm capital gains tax exemption on listed equities, if new shares are received pursuant to corporate actions (i.e., merger, demerger, stock split, and consolidation).

Asset management

The SEBI (FPI) Regulations, 2014 have recently been repealed and replaced by the SEBI (FPI) Regulations, 2019. To avoid unwarranted tax uncertainty, appropriate amendments should be made in the IT Act (and appropriate circulars and notifications) to replace the existing reference of SEBI (FPI) Regulations, 2014 with SEBI (FPI) Regulations, 2019.

Levy of increased surcharge should not be applicable to non-capital gains income earned by non-corporate foreign portfolio investors (FPIs).

Overseas investment fund reorganisations that are treated as tax neutral in their home countries should also enjoy tax neutral status in India.

Income-tax implications arising on segregation of assets pursuant to the sidepocketing rules notified by SEBI for mutual funds should be clarified.

The taxation regime of Category III Alternative Investment Funds (AIFs) should be brought at par with Category I and II AIFs, by according them tax pass-through status, and exempting investors in them from applicability of indirect transfer provisions.

The government should exempt investors in offshore private equity funds, REITs and InvITs, and all categories of FPIs [except FPIs that are excluded from the definition of Qualified Institutional Buyers per the SEBI (Issue of Capital and Disclosure Requirements) Regulations], from the applicability of indirect transfer provisions.

The government should re-write section 9A of the IT Act, relating to India-based fund managers, to make it simple and easy to comply with.

Real estate

Consider liberalising the ECB policy to permit lending to residential property development. Further, extension of priority sector lending to residential housing should help meet the sector’s liquidity needs.

Consider increasing the cap on the tax deduction available on repayment of housing loans from the current INR 1.5 lakh, and rolling back the cap of INR 2 lakh deduction on interest paid on loan borrowed for purchasing or constructing a house.

Consider extending the exemption granted to SEZ units beyond the sunset period of 31 March 2020. This will continue to incentivise developers and export-oriented units to operate from SEZs.

Insurance

The insurance industry has a long gestation period and typically takes 8−10 years to break even. Hence, the limit of eight years for carry forward and set-off of losses should be lifted for insurance businesses.

To achieve parity with life insurance companies, general insurance companies should also be exempted from the levy of MAT under section 115JB of the IT Act.

(The author is Partner, Deloitte India)