Budget 2019: What the govt can do for financial services

A live issue requiring government and regulator intervention is the liquidity crisis being faced by NBFCs..

Financial services industry is grappling with several complex issues that await government intervention. The next Budget could offer scope for such an intervention. Speculation is rife on whether the government will buck convention and present a full Budget on February 1, 2019: a bold ploy that has not been resorted to in 12 pre-election interim budgets presented in India so far. If that happens, the government could find a lot to do for financial services industry at the policy as well as tax level, including resolution of some long-standing issues and some clarifications, a few stemming from recent developments.

A live issue requiring government and regulator intervention is the liquidity crisis being faced by NBFCs. This will possibly require a multi-pronged approach which could include: the special refinancing window provided by RBI for eligible NBFCs, enabling banks to borrow from RBI for on-lending to NBFCs and HFCs and/or acquiring good quality assets from NBFCs and HFCs through the securitization route. The approach could also include redefining the minimum threshold for “amounts due” for NBFCs to approach the debt recovery tribunal, enabling mutual funds to roll over their investment in commercial papers issued by NBFCs/HFCs by providing them with a special liquidity window, etc.

Some long-standing tax demands can help ease the burden, such as enabling NBFCs to offer recovery of previously provided-for bad debts on a receipt basis, dispensing the requirement for borrowers to withhold tax from interest payments to NBFCs, rationalizing MAT provisions to exclude statutory reserves/provisions from book profit, exempting NBFCs/HFCs from limitation on interest deduction contained in thin capitalisation rules when interest is paid to non-resident lenders, given that capital adequacy norms apply to systemically important NBFCs/HFCs. On a related note, the tax impact of the side-pocketing rules notified by SEBI for mutual funds should also be clarified up front.

Another issue ripe for intervention is the asset quality issue in Indian public sector banks. RBI has forced prompt corrective action by 11 banks resulting in restrictions on lending by such banks, while they continue to accept deposits, contributing further to the liquidity crunch. The government should continue the consolidation of public sector banks in the interest of better management.

If Budget 2019 turns out to be an interim budget (and not a full Budget, as speculation suggests), then the government could well consider ironing out residual issues that remain in announced and implemented proposals. For example, from an investment perspective, clarifying how grandfathering provisions, introduced after the withdrawal of the long-term capital gains tax exemption on listed equities, would apply in case of corporate actions.

A confirmation is also sought that concessional tax rate of 5 per cent applicable to eligible interest income received by FPIs, also applies in the context of debentures; formal notification of the NIL tax rate for interest paid on Masala Bonds issued up to March 31, 2019, which remains a press release; providing tax pass through status to Category III AIFs; exempting non-resident investors in Category III FPIs, Category III AIFs, offshore private equity funds, and REITs/InvITs from the applicability of the indirect transfer provisions, etc. Certain additional measures are required in connection with the recent notifications providing tax neutrality for conversion of foreign bank branches into wholly-owned subsidiaries to ensure that the transition is comprehensively dealt with.

There is also the need for further rationalisation and simplification of provisions of Section 14A of the Income-tax Act and Rule 8D of the Income-tax Rules. From a GST perspective, two critical clarifications would be welcomed by financial services sector constituents – one, relating to applicability of GST to support functions rendered by the head office to branches located in other states; and second, the issue that has back offices of multinational firms concerned, i.e, the applicability of GST to support services that such back offices render.