The Finance Industry Development Council (FIDC), the trade body of the domestic non-banking finance companies, has written to the finance minister Pranab Mukherjee on the issues and concerns relating to the asset financing non-banking finance companies (NBFCs), to be considered in the forthcoming Union Budget 2009-10, which is to happen during the first week of July 2009.
These issues for FIDC are mainly in the areas of direct tax, indirect tax issues, funding and recovery mechanisms. Accordingly, the FIDC has requested the ministry for exemption from TDS on interest payment to NBFC-AFCs on loans under section 194A (3) (iii) of the IT Act, since they say the benefit is allowed to banks, but NBFCs-AFCs are excluded.
They also have asked the ministry to consider the non-inclusion of lease and sub-lease under Section 194-I of IT Act.
?NBFCs-AFCs operate on very thin margins. On that, if a 20% TDS is applied on gross lease rentals, this will result in negative cashflows,? says FIDC.
Moreover, an increase in exemption limit of TDS on interest paid on fixed deposits for NBFC-AFCs from Rs 5,000 to Rs 10,000 as done for banks last year is being asked to be considered.
The FIDC has also asked the ministry to extend the benefits under Sec 36 (1) (viia) and Sec 43D of the Income Tax Act, 1961, to NBFC-AFCs in line with banks, financial institutions and housing finance companies where provisions made for non-performing assets (NPAs) should be allowed to be deducted while arriving at the taxable profits of NBFCs.
On the funding side, the committee has strongly recommended setting up of a new refinance mechanism for NBFCs providing road transport, similar to National Housing Bank (NHB) for HFCs.
Now, the second issue is that, during the announcement of the second stimulus package on January 2, 2009, a mention of a special line of credit for NBFCs from public sector banks for financing of commercial vehicles was made. However, despite meetings by the FIDC with the Indian Banks Associations (IBS) and other ministries, it remains a non-starter. The committee has also requested for SIDBI and NABARD to start an exclusive refinancing window for the NBFCS-AFCs, similar to that of NHB for housing finance companies, to address the problem of funding in the long-term.
Talking about the indirect tax issue, FIDC has asked the ministry to further remove the service tax on hire purchase (HP) and leasing transactions.
The suggestion put forward is that interest in case of lease and hire purchase transactions should be fully exempted from the levy of service tax. As such, service tax in case of lease and hire purchase transactions should be levied only on lease management fee or processing fee. This would, thus be in tune with the levy of service tax in case of loan transactions where interest component has been totally exempted from the levy of service tax, said FIDC.