Budget 2021: NBFCs seek TDS exemption on interest income

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Taxes deducted at source don’t just bite pensioners living on interest income. They hurt big non-bank lenders, too.

About a dozen non-banking finance companies (NBFC) have approached the finance ministry seeking an exemption from Tax Deducted Source (TDS) on their interest income. The facility is available to high-street banks.

“Exemption from TDS and Thin Capital provisions in the upcoming Budget can be one of the ways to build liquidity at the hands of these large NBFCs, especially in the current pandemic,” said Sunil Badala, National Leader – Financial Services Tax at KPMG India. “Apart from this, financial institutions have also been demanding relaxation from applicability of TCS (Tax Collected at Source) provisions introduced in the last budget.”

If the government agrees, NBFCs will have more liquidity – at the expense of administrative compliance.

“Banks are exempt from the rigors of TDS on interest income and Thin Capital provisions. Similar exemption is not extended to large NBFCs,” said Badala.

Systemically important NBFCs with assets of more than Rs 500 crore are more or less treated on a par with banks on regulatory oversight, NBFCs argued.

The problem is acute for corporate borrowers that may have deducted the levy from interest payment to an NBFC. But this is not reported to the Central Board of Direct Taxation (CBDT), which in turn chases the lending NBFCs.

Moreover, NBFCs can earn that additional interest income in absence of the TDS provision. For example, if A is paying Rs 90 crore and keeping Rs 10 crore as provision, lending NBFCs should receive Rs 100 crore without the TDS cut.

“TDC is a real problem as we raised it earlier as well. But, the ministry was not convinced. This time, we need to see how FinMin responds to it,” said the head of a large NBFC with a sizable share of corporate loans.

Non-bank lenders held pre-budget consultations with finance minister Nirmala Sitharaman in two groups. While a dozen of large non-banking finance companies made a representation with the help of one of the Big Four consultants, the Finance Industry Development Council (FIDC) too put forward its demand from the industry.

Non-bank lenders have also requested that interest income on doubtful assets be made taxable only in the year of receipt and not “on time basis” as this is notional in nature, as per Ind-AS accounting system.

“NBFCs are the only players in the financial services required to follow Ind AS accounting system,” said Raman Agarwal, Designation, Co-chairman FIDC. “So a specific guidance note should be issued by the Income Tax department covering various aspects of taxation of NBFCs with respect to Ind-AS, harmonizing the provisions of income tax act with that of the Ind AS accounting system.”

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