In this era of economy, Non-Banking Finance Companies (NBFCs) have been playing an important role in the Indian financial system by complementing and competing with banks, and by bringing in efficiency and diversity into financial intermediation. NBFCs have evolved considerably in terms of operations, asset quality and profitability, and regulatory architecture.
Reserve Bank of India (RBI) generally considers NBFCs and Banks at far and ensure that all relevant key provisions as applicable to Banks are equally applicable to NBFCs. Also, the Indirect tax considers NBFCs and Banks almost at far as applicability of service tax/ GST provisions are considered. However, few provisions of Income-tax Act, 1961 (Act) are not made equally applicable to NBFCs unlike in the case of banks. In this article, I have tried to highlight few of the key Income Tax Provisions wherein NBFCs are not considered at par with banks and as a results NBFCs are not have equal level-playing field with banks.
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Non-availability of exemption of TDS under Section 194A
As per Section 194A of the Act, TDS at the rate of 10% is required to be deducted on the interest portion of the instalment paid to NBFCs. However, the Act provides a specific exemption on non-applicability of TDS on interest portion paid to Banking companies and public financial institution.
Non-applicability of TDS on interest components paid/ payable to Banks put them as a more preferred lender when compared to NBFCs as computation of interest in every EMI becomes more tedious for the borrower. Additionally, given the number of customers deducting TDS for NBFCs at times, the TDS deposited by the customer does not necessary gets reflected on government TDS portal and hence, claim of TDS for NBFCs gets partially rejected. Given the same, the Government should extent the said exemption to NBFCs as well.
Taxability of interest on Non-performing assets (‘NPAs’)
The operations of NBFCs as far as providing loans to the customer is similar to banks. Following RBI Guidelines, NBFCs and Banks recognize interest on loans and do not recognize interest on NPA. While there is same treatment in books of accounts for banks and NBFCs, when it comes to Income tax, NBFCs unlike banks do not enjoy the shelter of section 43D of the Act as far as taxability of interest on NPAs/ sticky loans.
Section 43D of the Act recognizes the principle of taxing income on NPAs only in the year in which they are received. This provision is only applicable to scheduled banks, public financial institutions, state financial corporations, state industrial corporations and housing finance companies (which are also non-bank entities) and cooperative banks and does not apply to NBFCs.
Given that non-inclusion of NBFCs in Section 43D, the tax authorities’ therefore takes a view that even in case of a ‘NPAs/ sticky loan’ irrespective of the fact that NBFC does not recognizes interest in books of accounts, the income accrues to NBFCs for the purpose of levy of income tax and should be liable to tax on due basis and not on receipt basis.
While this issue is now largely settled in the favour of Assessee given the recent Supreme Court Judgement in case of “M/s Vasisth Chay Vyapar Ltd” wherein the Hon’ble Supreme Court affirmed the Hon’ble High court judgement. The High Court applying ‘Real Income theory’ has held that interest on NPAs are to be taxed on receipt basis and not on due basis. Given this, the Finance minister should make suitable amendment in Section 43D retrospectively to include NBFCs therein to end pending litigations.
Lower deductibility of provision for doubtful debts
As per the RBI guidelines (prudential norms) for preparation of the financial statements, NBFCs and Banks are required to make certain provisions for NPAs as prescribed thereunder. The amount of the said provision was not deductible as per income tax regulation for NBFC till financial year 2016-2017 whereas the same was deductible (upto specific limit) for banks.
Considering the fact that NBFCs were also engaged in financial lending to different sectors of society, the said provision was also made applicable to NBFCs. However, the amount of deduction was curtailed at 5 per cent of total income whereas banks are allowed to claim at 8.5 per cent of gross total income. This deduction at the lower rate leads to lower deduction of provision to NBFCs. Therefore, the Government should rationalize the per cent for claiming the deduction.
Carry forward of accumulated loss in case of amalgamation or demerger
In case of amalgamation of banking companies, Section 72A of the Act provides for carry forward of accumulated losses and the same to be claimed by the amalgamated entity. Similar kind of benefit is not provided for NBFCs which results in lapse of accumulated losses upon amalgamation.
Others
Section 80TTB provides for deduction from taxable income upto Rs 50,000 of interest on deposits with banks, co-operative society and post office earned by the senior citizens. However, similar kind of deduction of interest income is not available in case deposits are kept by senior citizens with NBFCs. Distinguish treatment of interest on deposits with NBFCs impact its deposit business critically. Also, similar kind of distinguish provision is there on applicability of TDS in case of interest on deposits under Section 194A for banks vs NBFCs.
Different tax treatment under Act for Banks and NBFCs leads NBFCs in a disadvantageous position. Therefore, the Finance Minister should ensure that the tax benefits which are otherwise available to banks should be equally made available to NBFCs which will provide a relief to the NBFC sector.
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