Budget 2021 | Finance sector expects strategic reform

By Sunil Badala

The Financial Services sector is the backbone of the economy and considering the stress it has gone through in recent times, I am sure we can expect some major reforms. Every aspect of the FS requires a strategic reform. Banks and NBFCs are bearing the brunt of the economic slowdown, causing increase in delinquencies, resulting in cash flow problems and profitability. Considering the potential outlook, one-time accelerated deduction on account of provision for doubtful debts for Banks and NBFCs would be a much-required relief. Foreign banks also play critical role in lending role in lending in the economy, therefore, it would be appropriate to reduce the tax rate applicable to a branch of foreign bank in India and bring them on par, thereby creating a level playing field for foreign banks operating in India by way of a branch.

TDS (taxes deducted at source) on interest earned by Banks is not applicable under section 194A. As the nature of lending business for Banking units and NBFC’s are almost similar, such TDS exemption should be made applicable to NBFC’s as well. This will help NBFCs to manage the liquidity crisis in the current times. Banks and NBFCs have also been demanding relaxation from the applicability of TCS (tax collected at source) and equalisation levy norms introduced in the last Budget.

Everybody agrees that the Insolvency and Bankruptcy Code, 2016 is a path-breaking reform, however, to make it effective it is important to suspend the applicability of the minimum alternate tax provisions (where applicable) to companies undergoing resolution under IBC.

Foreign Portfolio Investors (“FPIs”) inflows play a critical role in the market. The change in the dividend taxation policy has inadvertently hurt them the most. I feel that something quite simple as providing clarification to allow domestic companies to consider the beneficial treaty provisions while withholding taxes for FPIs would go a long way in boosting their market sentiment and would not cause any loss to the exchequer. One long-standing demand of the FPIs has been that tax on Long Term Capital Gain (‘LTCG’) should be rolled back. In the current scenario, in order to provide an impetus to the investment in the Indian securities, the government should consider rolling back the tax on LTCG.

With lots of reinsurers setting up business in India, there should be a specific taxation regime for reinsurance branches. Considering that the gestation period for life insurance is very long vis-a-vis other business and hence, carry forward of loss should be allowed for 10 years (instead of 8 years).

IFSC being the first financial services center deserves special attention and nurturing. The Government should consider providing relaxation/clarifications on certain issues like the applicability of the General Anti Avoidance Rule (‘GAAR’). Also, I think we will see Alternative Investment Funds (‘AIF’) Cat I and Cat II set-up in IFSC being brought on par with AIF CAT III funds which enjoy friendly tax treatment. Aircraft leasing from IFSC is another exciting development and I feel we will see some beneficial changes in the tax and regulatory space to make IFSC compete with mature global markets and given an impetus to grow it.”

(The author is Partner and Head Financial Services, Tax, KPMG in India)