Finance sector: key issues in Budget 2022

The financial services sector is one of the high growth sectors of the Indian economy. It responds dynamically to the movements in the global financial sector. The multiple sub-sectors are hoping for a favourable announcement to solve existing bottlenecks.

The Union Budget is eager to analyze the impact that it will have on the financial services sector and the sub-sectors within this year. We have identified the key concerns and included our predictions for the Union Budget 2022.

Foreign portfolio investors FPIs will be concerned with sections that deal with the taxation and exemption from taxation for investment instruments held. Section 194 LD Sunset clause and interest rate restriction: To encourage FPI investors to invest in rupee-denominated bonds, reduced TDS should be made perpetual and not expire on June 30th, 2023. The interest paid is to the extent of the SBI base rate plus 500 basis points. The TDS rate of 20% should only apply to the interest paid in excess of the prescribed cap.

Section 194 A 3 TDS on Securities Lending and Borrowing Mechanism: The provisions of the Act can be amended to exempt borrowing charges paid by National Securities Clearing Corporation Ltd NSCCL by the borrower on securities borrowed under the Securities Lending and Borrowing SLB scheme from the provisions of tax deduction at source.

For the purpose of discharging the advance tax liability, the cost of acquisition should be adjusted on the fair market value FMV as on March 31 and the balance should be adjusted in the year in which the cost of acquisition is crystallised, according to Section 45, 48, 49 and or other relevant sections of the SLB. Under section 115 AD: To encourage FPI investors to invest in units of Business Trust, an exception may be provided for tax interest received from REITs and InvITs at a concessional rate of 5% plus applicable surcharge and cess under section 115 AD of the Act.

What are the chances that the banking sector will get a boost in Budget 2022 -- 23?

Non-banking finance companies NBFCs will try to fortify their interests in the industry by clarifications around these five pointsers :

Section 194 A -- Exemption from TDS on interest income received by NBFCs: Since NBFCs are similar to banks, the benefit of the provisions of section 194 A should also be extended to them, i.e. Interest income earned by NBFCs should be exempted from any TDS requirement. The tax liability of the NBFCs could be discharged by way of advance taxes.

Income computation and disclosure standards ICDS NBFCs - Allowability of mark-to-market losses on trade investments - It is suggested that NBFCs be exempted from the aforesaid requirement and be allowed a tax deduction for losses recognized on an individual security basis and not for the category as a whole.

Section 269 ST and Section 269 T exclusion to NBFCs and Asset Reconstruction Company ARCs on loan repayments is recommended that NBFCs and ARCs should be excluded from the scope of section 269 ST and 269 T of the Act to provide a boost to recoveries and consequently benefit this sector.

There is a requirement that NBFCs be excluded from the provisions of section 94 B of the Act, along with banks and insurance companies. This change is expected to help the NBFCs raise capital from their overseas associated enterprises because of the fact that lending and borrowing money is an integral part of the business operations of the NBFCs.

Extending the benefit under Section 43 D of the Act to other categories of NBFCs is recommended, along with deposit-taking and systematically important non-deposit taking NBFCs, to include non-systematically important NBFCs in an effort to reduce the hardship for NBFCs.

These sub-sectors have analysed their requirements and now await the budget announcements to see what the quantifiable impact it will have on their holdings, business and earnings.

The predictions were made after careful analysis of government documents, industry standards and behaviour of taxation trends.

The intent is to streamline the administrative, financial and taxation systems to bring modernity, accuracy, and fairness into all spheres of the financial services ecosystem.

The author is Associate Director, Grant Thornton Bharat and Amit Kedia, Chartered Accountant, Mumbai.