|CULTURE & SOCIETY
The needs of Infra
Industry veteran Hemant Kanoria enumerates the expectations of the infrastructure sector — from influx of NBFC funds to key amendments in the existing I-T act
Photos: Shailendra Pandey
INDIA INC eagerly looks forward to Union Budget
2012-13. In a scenario of high inflation, liquidity crunch, high interest rates and subdued business sentiment, the Budget is expected to provide policy directions that will shape the course of our economy. Infrastructure can be a game-stopper here, if capacity addition is not done proactively. A push in this sector is much needed. Companies and SEZ units in this sector need to be exempted from Minimum Alternate Tax (MAT). The $30 billion annual cap on External Commercial Borrowing (ECB) may be lifted temporarily so that India Inc raises more long-term resources from abroad for infrastructure.
Sectors that merit immediate attention are:
POWER: The benefit for this sector under Section 80IA will expire on March 31. However, given the huge demand-supply mismatch, it is imperative that the government extend it. The financial health of state electricity boards is a major area of worry, and can translate into a banking sector crisis if not addressed. The VK Shunglu Committee recommendation, that RBI should buy all bad SEB loans from banks, needs to be taken seriously. Around 55 per cent of our power production is coal-based, but despite abundant reserves, we import 140 million tonne annually. Of the 294 coal blocks here, 140 are in the no-go zone. These things must be rectified.
ROADS: Rural roads need our attention. Better transport network in the hinterlands will revitalise rural economy. Government should consider building concrete roads along select rural stretches. Although they costs six to seven times more than asphalt ones, they need minimum maintenance and last very long.
LAND ACQUISITION: This has emerged as a serious challenge both for infrastructure creation and industries. While the centre has a Land Acquisition Bill, each state is free to make its own. Centre should reach out to the states and work together to identify non-agricultural or fallow tracts, and create a national land map. Farmers willing to offer their land for industrialisation can approach state governments. Based on this ‘land bank’, industries can buy land from the state government and also directly negotiate with farmers. Government can play the facilitator. Connecting each zone to the nearest highway with a cement road and a rail link can facilitate attracting investment.
To enhance revenues, early implementation of the Goods and Services Tax (GST) and Direct Tax Code (DTC) is a must. With services accounting for 57 per cent of India’s GDP, more services need to be brought under the tax net.
Expectations from the NBFC sector
A healthy growth of Micro, Small and Medium Enterprises (MSMEs) is central to the government’s ‘inclusive growth’ philosophy. MSMEs are dependent on non-bank financial companies (NBFCS). However, NBFCS are constrained by a host of tax issues. The following are the expectations from the NBFC sector:
1. Nil TDS for NBFC
Section 194A of the Income Tax Act provides for tax deduction at source (TDS) at the rate of 10 per cent on payment of interest (excluding interest on securities). Sub-section 3 provides for non-applicability of the section in cases of banking companies and where Banking Regulation Act applies. However, such exemption has not been extended to NBFCS. Consequently, NBFCS’ interest receipts entail a TDS rate of 10 per cent.
Also, the EMI on monthly loan instalments payable to NBFCS has an interest component which is also subject to TDS. In addition, it is practically impossible to predict the volume and number of new customers and collect their details. Therefore, extensive paperwork and administration, coupled with huge collection costs, make TDS collection quite expensive. Also, the TDS estimated for advance tax computations actually turns out to be much lower than what is deducted by customers. Getting refunds can often be time-consuming. Tax refund for FY11 till November 2011 stood at Rs 68,994 crore.
Additional limitations of the system are:
a) Follow-up with each of the thousands of customer for TDS certificates every quarter (details of which are mandatory in the I-T return) becomes almost impossible.
b) If the TDS certificate is issued by the customer, if return hasn’t been filed or not filed properly, the credit wouldn’t be granted to the NBFC as details would not be in the NSDL system.
c) Once the TDS credit is disallowed, NBFCS have a hard time following up with customers and the exchequer has a hard time clearing outstanding demands which may not even exist.
Asset finance and infrastructure finance NBFCS (AFCs and IFCs) form an integral part of the financial fabric of our economy. It is very important that they get a level playing field. It is therefore suggested that the benefit of ‘nil TDS’ be extended to the NBFCS under Section 194A.
Also, Section 119 enables the Central Board of Direct Taxes (CBDT) to issue orders, instructions and directions to other I-T authorities as it may deem fit. These include relaxing tax collection provisions which are causing undue hardship to a class of assesses. As per Section 295 of the Act, the board may, subject to the control of the centre, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act.
Rule 28AA of the I-T Rules, 1962 prescribes two formulae as per which the officers issuing TDS certificates may compute the lower withholding tax rate under Section 197.
The rule causes undue hardship to NBFCS with large number of customers with multiple tan numbers. To alleviate this difficulty, we suggest the following amendment in Rule 28AA: “The assessee be granted nil TDS under Section 197 if he agrees and/or secures payment of taxes in the current year to the tune of average of taxes paid in the last 3 years as per return.” This is within the power of CBDT under Section 119 or under Section 295 read with Rule 28AA.
CBDT may issue directions to the officers issuing TDS certificates to issue lower/nil withholding certificates to NBFCS considering the advance tax deposited/to be deposited by the NBFC on the basis of a scientific formula. CBDT may also consider instructing TDS officers to relax the requirement of providing names of specific deductors for which the lower withholding certificate would be issued.
2. NPA calculation for NBFCS under present regime and under DTC
Although NBFCS are also regulated by the RBI just like banks or any other financial institutions FIs, I-T laws treat them differently when provisioning for non-performing assets (NPAs). This severely impedes NBFCS, thwarting the credit delivery mechanism to MSMEs.
(I) Under Section 36(1)(viia) of the I-T Act, only banks and FIs enjoy deduction on prov-isions for bad and doubtful debts. A deduction of 7.5 per cent of gross income is allowed as expenses for banks. For FIs, it is 5 per cent. Even foreign banks are allowed benefits under this section, but NBFCS are excluded, despite both following the same guidelines. In absence of NBFCS in this section, ‘provision for NPA ’ made in terms of RBI prudential norms does not constitute an expense for purposes of the I-T Act. So the entire provisioning as per RBI prudential norms is disallowed for purposes of computing taxable income of NBFCS. Thus, NBFCS are subjected to higher taxation, and hence are at a disadvantage vis-à-vis banks and other FIs.
As the Government itself considers NBFCS a vital channel for credit delivery, especially to the under-privileged segments, it is essential that discriminations between NBFCS and banks be eliminated. This inconsistency may be resolved by including NBFCS also in Section 36(1)(viia) of the I-T Act so that the benefits are also extended to infrastructure financing NBFCS. It is already in the proposed Direct Tax Code (DTC) of 2010.
(II) Provisions under the I-T Act’s Sections 115JA and 115JB were amended with retro-spective effect, starting from AY 1998-99 and 2001-02 respectively. With these, any diminution in value of an asset should be added to the ‘book profit’ for calculation of MAT. The impact of this change is particularly severe on NBFCS because provisions made for bad debts/NPAs are added to the ‘book profit’, that too from the 1998-99. Not only does this mean reopening of assessment of previous years, but also a possible I-T demand on the loans which NBFCS might not recover. This implies further I-T liabilities on lost assets. This has put the fiscal health of NBFCS under pressure.
Certainly this would not have been the intent of the finance ministry, because:
a) The memorandum wanted to impose MAT only on items ‘below the profit line’, like deferred tax provisions, and dividend distribution tax.
b) The provision for NBFCS’ NPAs is not just for unascertained liability, but an administrative expense — a charge on profit and loss. It may be resolved by amending the explanations to the sections and rolling back the ‘retrospective effect’ of the changes in the Finance Act, 2009.
(III) DTC allows 1 per cent of total average advances of notified NBFCS only to be used as provisions for NPAs. NPA provision should be allowed to the extent created as per the needs of the business and not restricted to the minimum provisioning requirement. RBI prescribes this requirement. However, business may demand provisioning higher than that. That’s why the provisioning should be allowed as a deduction.
3. Case for extending section 43d of the I-T act to NBFCS
I-T Act’s Section 43D recognises the principle of taxing income on sticky advances in the year they are received. This is already available to banks, FIs, state financial corporations and housing finance companies, but not NBFCS.
What they want
• All non-banking financial companies (NBFCs), which finance the country’s entire MSME sector, must be given benefits like ‘nil TDS’ and better NPA estimates, which banks already enjoy
• The infra sector itself needs focussed attention from the government, especially in the rural tracts
• NBFCs leasing out construction or farm equipments need a better deal than the one they already have
• The government should form policies to encourage venture capitals to invest more in the infra sector
• The government should also remove all ambiguities when taxing things; a transaction can be either a product or a service, but not both. So, either VAT or Service tax should apply, not both
• A significant part of the priority sector lending by banks is to the road transport sector, and banks’ lending to NBFCS for onward lending to the road transport sector.
• Like banks, NBFCS play a crucial role in the rural and social sectors by providing finances for the acquisition of trucks, buses and tractors.
• NBFCS’ exposure to the rural/social sectors is more direct and pronounced, since financing for acquisition of vehicles provides a spin-off benefit by creating jobs and opportunities in rural parts.
It is only fair that the benefits given to banks and FIs under the captioned sections of the I-T Act be extended to NBFCS too. It is supported by favourable judicial pronouncements.
4. NBFCS should to be exempted from withholding tax on ECB
Compared to domestic sources, ECBs are a cost-effective source of funds. So, NBFCS rely on ECBs so to service their customers better. However, payment of Withholding Tax puts NBFCS at a disadvantage, as foreign lenders want payment of the entire interest without Withholding Tax deduction. Thus, NBFCS need to gross up the amount with the Withholding Tax: They also have to pay back to the customer an amount equivalent to the Withholding Tax. This pushes up the cost for NBFCS, which is ultimately passed on to the end-borrowers. Ideally, ECB borrowings should be exempted from Withholding Tax by amendment under Section 10(15).
5. Higher depreciation rates for construction equipment
The I-T Act allows depreciation at the rate of 100 per cent in certain equipment. It also allows high rate of depreciation (30 per cent) to cars, buses, lorries and taxies when they are run for hire. DTC also prescribes the same rates for these categories. However, construction equipment, which contribute immensely to infrastructure development, are not given this benefit when financed. Instead, the rate is only 15 per cent. This acts as a roadblock to infrastructure development.
NBFCS often finance construction equipment and other plant and machinery under lease agreements. Though the basic features of ‘running an asset on hire’ and ‘providing an asset on lease’ are same, tax authorities do not allow a higher rate of depreciation on construction equipment and other plant and machinery, although they are subject to higher wear and tear. We would like to propose that equipments provided by NBFCS to users under hire/lease should be entitled to a higher depreciation rate
Also, assets like construction equipment and plant and machinery become obsolete faster. So, the depreciation rate should be 30 to 50 per cent. This will also give an impetus to infrastructure spend and will incentivise such investments.
Additional depreciation in the first year is allowed for the manufacturing sector under Section 32. This should also be extended to NBFC-AFCs leasing construction equipment.
6. Exemption from excise/customs/service tax for leasing of construction equipment
Leasing has been the most potent form of capital formation, and for a developing, infrastructure-deficient nation like India, it can be a very cost-effective financial instrument. However, India is yet to wake up to the benefits of leasing. The central government needs to issue notifications to exempt leasing of construction equipment from excise duty under Section 5A of the Excise Act, from customs duty under Section 25 of the Customs Act and from service tax under Section 93 of the Service Tax Act.
7. Duplicity of tax: Service tax and VAT on same/similar transactions
When a transaction is deemed a sale, it cannot be treated as a taxable service too and made exigible to service tax. Two constitutional levies cannot simultaneously be imposed on same value of the transaction or part thereof.
8. Exemption to NBFCS registered with RBI from the purview of section 269t of the I-T act
• Section 269T of the I-T Act was amended by the Finance Act 2002 to make it obligatory for all to repay any loan or deposit only by an account-payee cheque or account-payee bank draft drawn in the name of the person who has made the loan or deposit if the amount of loan or deposit with interest is Rs 20,000 or more. However, transactions with banking company are exempt from this provision
• Like banks, NBFCS also extend loans to various persons. However, NBFC transactions are not exempted from this provision.
Since the loan portfolio of NBFCS is similar to that of banks, and considering the same regulatory environment under which they operate, NBFCS registered with RBI should be exempt from Section 269T of the I-T Act.
9. Rule 6(3B) and section 65 of the finance act 1994 (Service Tax)
Under the abovementioned rule, an fi providing taxable service specified in the sub-clause 105 of Section 65 of the Finance Act shall pay every month 50 per cent of the CENVAT Credit availed on inputs and inputs services for that month. The tax research unit of the finance ministry explained, vide DOF No 3345/3/2011-TRU, dated February 28, 2011, Para 1.16 of Ann-C, that a substantial part of a bank’s income is by way of interest. It has been difficult for the department in ascertaining the amount of credit flowing into earning these amounts. Thus, FIs are being obligated to pay 50 per cent of the credit availed.
Every loan transaction which fetches interest is associated with various fees, which are subject to Service Tax. Interest from loans is out of the purview for valuation of Service Tax, but its associated fee-based incomes are subject to it.
The need of the hour is a circular for clarification. A circular under Section 65 may be issued to the effect that those NBFCS which deposit an amount of Service Tax in relation to fee based income associated with loan transactions must be allowed to avail 100 per cent CENVAT Credit on input services.
10. Reinstatement section 10(23G) of the I-T ACT
The 2006 Union Budget announcement on removal of incentives on infrastructure financing under Section 10(23G) of the I-T Act from 2007-08 is adversely impacting the infrastructure creation. Under this section, for companies engaged in infrastructure projects via equity or debt or both, their net income from such investments is exempt from tax. The withdrawal of this exemption was supposedly due to a benign interest rate regime in 2006. However, interest rates have climbed. There is also a global credit crunch scenario. This is likely to make capital even scarcer. Removal of such a cushion has put a question mark on the viability of many projects.
The worst affected are institutions like SREI, IDFC and ILandFS, who have already made substantial investment in infrastructure projects. Many banks have been affected.
11. Broadening scope of venture capital under section 10(23FB)
Of late, infra projects have attracted investments in the form of venture capital (VC). This trend needs to be maintained to broad-base the sources of capital.
Earlier, under Section 10(23FB) of the I-T Act, any income of a VC company or fund was exempt from tax. However, in 2007, the scope of VC was narrowed down to select sectors. Given the importance of VC funds in infrastructure, the scope of VC undertakings should be widened to include income from leasing equipment to infrastructure and also all the sectors of Section 80IA.
12. Review of section 206AA
India has entered into double taxation avoidance agreements (DTAAs) with multiple countries. As per Section 90(2) of the I-T Act, provision of dtaa or provision of income tax, whichever is more beneficial to the assessed, should prevail. However, under Section 206AA, government has made use of PAN mandatory for TDS. This overrides Section 90(2). Also, most foreign lenders do note have a PAN. Thus, the borrower not only has to pay the promised rate of interest, but also TDS. This impacts profitability. Also, expecting a foreign lender to have a PAN is impractical. Ideally, Section 206AA should not be applicable on any payment made to a non-resident entity, which is covered under DTAA.
13. Once-in-a-lifetime settlement commission
Presently, for resolution of tax disputes, government allows an assessee to approach the Settlement Commission only once, that too when the case is pending before the assessing officer (AO). If it has escalated to a level above the AO, the once-in-a-lifetime window gets closed. This leads to non-settlement of disputes and delay in revenue collection. Assessees should be given the freedom to settle disputes through this forum without the restriction of this once-in-a-lifetime conditionality. Also the assessee should be given the freedom to settle at any point (at any level — AO and above) of the dispute.
14. Allowing of group taxation
Presently, filing of tax returns for companies with multiple subsidiaries is done individually. In some cases, some subsidiaries are get refund from government while others need to pay tax. In such cases, government has to take the trouble of refunding select subsidiaries as well as pay interest on that amount. This is time-consuming and complex. If group taxation is allowed, each group as an entity would have to either pay tax or claim refund. This will substantially reduce paperwork and benefit both the government and the corporate.
15. Financing of AGRI equipment
Introduction of new technology in farming and agro-processing, and setting up of warehouses and cold chains can do wonders for this sector, which is still the source of livelihood for the majority of our populace. Green revolutions not only generate new employment, but also bolster food security of the country besides earning foreign exchange through exports. NBFCS play a vital role by lending/financing equipment used for agriculture. Government should consider extending some incentives to such NBFCS.
16. Widening the scope of section 80IA and extending it to NBFCS
Presently, the benefits under Section 80IA accrue to certain sectors, but NBFCS, which lend to those sectors, are deprived of the benefits. Without the support of NBFCS, the sectors under Section 80IA cannot achieve their goal. Thus, it is only logical to bring NBFCS, at least IFCs and AFCs, under Section 80IA to the extent of the income earned by lending to infrastructure projects and to that extent of the deduction reduced from the profits from those sectors.
The author is the chair and managing director of Srei Infrastructure Finance Ltd.