Budget 2020: Financial services sector key area to boost economy, investor confidence

Updated: Jan 28, 2020 1:09 AM

Union Budget 2020 India: Section 43D of I-T Act, 1961, recognises the principle of taxing income on sticky advances only in the year in which they are received or credited to P&L, whichever is earlier.

Budget 2020 India: The financial services sector, being the backbone of the economy, would be a focus area to boost the economy and investor confidence.

By Sunil Badala & Hardik Vasa

Budget 2020-21: The year gone by has been tumultuous for the economy. We already saw a Budget in July 2019, post the government taking charge. The Ordinance for lowering corporate tax rates was a welcome decision to provide impetus to domestic industries. Yet a lot needs to be done to reinvigorate the economy. This is exactly the expectation from the finance minister as she gears up to present the Budget. Fulfilling demand across sectors and trying to keep the fiscal deficit in control at the same time is no easy task, but the economy is in a dire need of a push that propels it to the $5-trillion trajectory.

The government has taken various steps to revive the economy. The financial services sector, being the backbone of the economy, would be a focus area to boost the economy and investor confidence. Whilst the wish list of sectoral players is long, even if some changes discussed hereafter are considered by the minister, it would give a boost to the sector.

The government should scrap long-term capital gains (LTCG) tax introduced by the Finance Act, 2018. The other proposition could be to scrap securities transaction tax (STT). The cost of transacting on Indian stock exchanges includes STT, brokerage, GST, stamp duty, SEBI turnover fees and exchange transaction fees. Considering these, it becomes expensive to trade in securities. STT makes up a significant part of the cost of trading in Indian equities and derivatives. The purpose of introducing STT in 2004 was to exempt LTCG on equities and lower short-term capital gains tax rate. Effective April 2018, the LTCG tax was reintroduced without any corresponding relief in STT. LTCG could be scrapped, or STT could be removed or significantly reduced.

NBFCs are a major source of financing and play a key role in supporting the banking sector. Section 43D of I-T Act, 1961, recognises the principle of taxing income on sticky advances only in the year in which they are received or credited to P&L, whichever is earlier. In the last Budget, the benefits of Section 43D were extended to certain categories of NBFCs to ease liquidity crunch. Most of these NBFCs need to prepare accounts in line with Ind As and, thus, recognise interest income on certain stage-III loans (NPAs) in P&L account. So, they are unable to claim the benefit of Section 43D. Suitable relief should be provided for such NBFCs.

Another change the NBFC sector has been asking is to be on a par with banks when it comes to thin capitalisation norms. To fund borrowings, NBFCs may need to borrow and, for this, may depend on global parents for direct borrowings, guarantees, etc. To cap the interest expense in such cases can be quite harsh. There is a need to extend the exemption from thin capitalisation norms to systemically important NBFCs or at least bring clarity on the extent of applicability and coverage intended, i.e. whether the borrowings from Indian branches of foreign banks would be covered? Considering that these branches pay tax in India at the highest rate and there is no base erosion, there is a case to keep such payments beyond the purview of thin capitalisation norms.

As the objective of the India International Financial Services Centre (IFSC) is to compete with IFSCs in global markets, exemption from obtaining PAN in India and filing tax returns should be extended to all investors and funds set up under IFSC. The government should also do away with the 9% MAT currently imposed on such entities.
The minister, in her last Budget speech, indicated there may be an increase in FDI limit for insurance sector. But the announcement has not been made. It is expected the government will increase FDI in the core insurance sector to 74% from 49%. Period of carry-forward and set-off of losses in case of insurance business should be increased. Given the quantum of stressed assets in the system, the government should prescribe a concessional tax rate for foreign investors.

There are several cases of fund houses resorting to segregation of bad portfolios from schemes—known as side-pocketing of schemes. Clarity is needed on the tax treatment to be followed in such cases, especially as to what should be the date and cost of acquisition of segregated units?

It will be interesting to see how many of these changes come through on February 1, 2020.

Watch Video: What is Union Budget of India?

Badala is partner & head of Financial Services, Tax, KPMG in India, and Vasa is a chartered accountant

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