RBI recommends interest tax relief on PDs’ investment income

Anindita Dey

Mumbai, Aug 8: The Reserve Bank of India (RBI) is understood to have recommended to the ministry of finance (MoF) for exempting primary dealers (PDs) from paying tax on interest income from investments.

The move follows the tax imposed on major state-run PDs on their interest income, and a representation on the same has been made by PDs through the Primary Dealers Association of India (PDAI) to the Central Borad of Direct Taxes (CBDT) for the latter’s consideration.

According to sources, this representation assumes significance in the light of the fact that in the last audit of the Comptroller and Auditor General (CAG) on PDs, a qualification towards provision for the said tax has been effected.

However, to a clarification sought by the PDs, the RBI had specified that tax need not be paid on interest income, but it was not taken into consideration by the I-T as notification was not there.

PD sources said income-tax is usually levied on advances made by banks as per the original Income-Tax Act (1974).

However, the clause was repealed and reintroduced around 1992-93 whereby taxes was to be paid on the loans extended by banks, but not so on investments. PDs are of the view that while the burden of loans is passed on to borrowers — with investments tax-free — the same should be made applicable for PDs.

The IT department is of the view that when the notification was made after the reintroduction of the Act back in 1992-93, the applicability or otherwise of tax was not clear given that PDs came into existence only in 1996.

Prior to this, in consultation with RBI, the Indian Banks Association (IBA) had made a representation to the tax authorities for exemption. However, the tax authorities continued to impose the tax in the absence of a notification.

It was pointed out that IT department had levied a tax liability of around Rs 1,500 crore on the Life Insurance Corporation (LIC) on the interest income from government securities, bonds and government debentures since 1992-93.

However, LIC had won the case against the tax department at the tribunal.

The Unit Trust of India (UTI) also had a similar experience. In both these cases, the IT department has decided to contest the ruling in the higher courts. The IT department is reported to have contended that up to 1992-93, financial institutions were not taxed on interest income. However, after the revival of Finance Act-(II) 1991, all public institutions under section 4A of the Companies Act (1956) have been defined as “credit institutions” under sub-clause (ii) of clause (5A) of section 2 of the IT Act.