Budget 2020: Access to cheaper credit, tax rationalisation can revive economy, boost consumption

To provide the necessary impetus to retail investors, the government could look at personal tax slab changes and roll back long-term capital gains tax

Gayathri Parthasarathy January 30, 2020 14:48:30 IST
Budget 2020: Access to cheaper credit, tax rationalisation can revive economy, boost consumption
  • To provide the necessary impetus to retail investors, the government could look at personal tax slab changes and roll back long-term capital gains tax

  • While the bank balance sheet clean-up exercise continues, there is a need for faster resolution of IBC cases to manage NPAs for the banking sector

  • The FDI limit in insurance companies might be extended to 74 percent from the current 49 percent to seek fresh foreign long-term capital flows into the economy

Union Budget 2020 is expected to continue the government’s expansionary fiscal stance to address recessionary pressures and economic slowdown. Reviving domestic consumption and investment, amidst growing global uncertainties, is a key challenge for the government. The government could look at measures to ensure access to cheaper credit and tax rationalisations to give the economy a boost.

To provide the necessary impetus to retail investors, the government could look at personal tax slab changes and roll back long-term capital gains tax or, alternatively the levy of SST (Securities Transaction Tax) could be abolished in order to increase the disposable income of individuals.

Expectations from Budget 2020 for some of the financial services sub-sectors are:

While the bank balance sheet clean-up exercise continues, there is a need for faster resolution of IBC (Insolvency Bankruptcy Code) cases to manage NPAs (Non-Performing Assets) for the banking sector. The Supreme Court's judgment in a recent case has solved a major resolution issue, which was pending for quite some time. Greater momentum in such resolutions is key to building confidence and investment momentum.

NBFCs and securitisation deals

NBFCs (Non-Banking Financial Companies), to a great extent, are dependent upon securitisation deals to raise funds in the wake of the current liquidity scenario. Though securitisation deals are happening, several NBFCs are embroiled in a controversy with the tax department regarding the applicability of withholding tax provisions on excess interest spread or the credit enhancement amount. Clarity in the matter will go a long way to further enhance the depth of the securitisation market.

Budget 2020 Access to cheaper credit tax rationalisation can revive economy boost consumption

Representational image. Reuters.

The Finance Act, 2017, vide Section 94B, introduced provisions to restrict interest deductibility. The said section disallows interest payments to non-resident associated enterprises (AE) if the total interest payments are in excess of 30 percent of earnings before interest, taxes, depreciation and amortisation (EBITDA). Notably, the aforesaid section exempts banks and insurance companies from the applicability of these provisions, keeping in view the special nature of these businesses. No such exemption, however, has been extended to any category of NBFCs. NBFCs also play an important role as banks in the financial sector and, therefore, the exclusion to banks should be extended to NBFCs also.

NBFCs will be required to recognize interest income on certain stage-III loans (NPAs) in the profit and loss (P&L) account in accordance with Section 43D of Indian-AS Act which mandates taxing interest on certain categories of bad or doubtful debt on receipt or credit to the P&L account, whichever is earlier. Given the same, NBFCs may not be able to claim the benefit of Section 43D in relation to such interest. The government could look at providing a suitable exemption in the said amendment for NBFCs that are required to recognise the interest in the P&L account purely on account of Ind-AS requirements and interest should be taxable on a receipt basis.

Clarity on tax treatment

The FDI limit in insurance companies might be extended to 74 percent from the current 49 percent to seek fresh foreign long-term capital flows into the economy.

We have come across several cases of fund houses having resorted to segregation of bad portfolios from schemes—also known as side-pocketing of schemes—in the last few months. 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 the segregated units.

To enable Indian IFSC-registered entities to compete in international markets, exemption from obtaining PAN in India and filing tax returns should be extended to all investors and the government should do away with 9 per cent MAT currently imposed on entities set up under IFSC.

Securitisation receipts trusts

Given the quantum of stressed assets in the system and the significance of resolving them at the earliest, the government should prescribe the tax rate at which foreign investors would be taxed in relation to such income.

Lastly, there is a need for the government to take measures aimed at ensuring access to cheaper credit and bolster investor confidence in order to provide a much-needed impetus to India’s economy.

(The writer National Head, Financial Services, KPMG in India)

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