Non-banking financial companies (NBFCs), also known as shadow banks, have suffered a blow ever since a liquidity crunch brought to the fore various issues affecting the sector. As Finance Minister Arun Jaitley tables the interim Budget in Parliament on February 1, analysts will keenly scout for any announcements on the cash-starved sector. From management reshuffles to open market operations, the central bank and the government have time and again announced measures to rescue the non-banking financial companies. Analysts say liquidity constraints faced by some NBFCs may hamper credit supply and subsequently economic growth in the coming years.
Industry body Ficci has said that the benefit of Section 43D of the Income Tax Act should be extended to non-banking financial companies, in order to ease the liquidity conditions for the sector, among other steps. Section 43D recognises the principle of taxing income on sticky advances only in the year in which they are received - a benefit already available to banks, financial institutions, co-operative banks and state financial corporations.
"In absence of specific coverage of NBFCs (other than housing finance companies which are already covered by the provisions of Section 43D) in Section 43D of the Act and in light of the ICDS provisions, NBFCs would be required to recognise income on such NPAs for tax purposes on an accrual basis, resulting in levy of tax on income which may not be realised at all," noted Ficci, in its pre-Budget memorandum 2019-20.
This would severely impact the liquidity of NBFCs in terms of cash flow payouts, their profitability and also has a consequent impact on their cost of operations, it noted. "An amendment should be made to Section 43D of the Act, to extend the benefit of section 43D of the Act to non-banking financial company, whereby interest income on non-performing assets should be taxed only on receipt basis."
Here's a list of some other expectations for the NBFC sector by industry body Ficci:
- Exclusion of interest/processing charges paid to NBFCs from the provisions of Section 194A
- Taxability of excess interest spread (EIS) in direct assignment transaction be made on receipt basis
- Provide clarity for higher depreciation rate on vehicles given on lease by NBFCs
- Higher depreciation rate on plant and machinery given on lease by NBFCs
- Exclusion from applicability of provisions of section 269T
- Interest deduction limitation under section 94B
- No MAT to be levied on statutory reserves and statutory provision created by NBFCs