The Banking and Financial Sector in India has acted as the growth engine for the economic development of the country. Certain key expectations of the Banking and Financial Sector from the Budget 2010 are listed below:

Venture Capital Fund – Pass through Status

It is expected that the venture capital funds registered with SEBI should not be liable to pay any tax on income received by them for, without any restriction of investment in any specified businesses as they are only collective investment vehicles. However, presently, section 10(23FB) of the Income Tax Act, 1961 (the Act) restricts exemption only to income earned from investment made in a venture capital undertaking (VCU) engaged in specified businesses. This is consistent with the draft Direct Tax Code wherein financial intermediaries like Venture Capital Fund etc. are treated as pass through entities.

Provision for bad and doubtful debts 

The deduction for provision made by banks towards bad and doubtful debts should be allowed in accordance with guidelines issued by the RBI. Currently, the deduction for provision towards bad and doubtful debts is limited to 7.5% of total income and 10% of rural advances for Indian banks (5% of total income for foreign banks). Also the said provisions should be extended to Non Banking Financial Companies (NBFC) registered with the Reserve bank of India.

Foreign Direct Investment in Insurance Sector

At present, Foreign Direct Investment (FDI) is restricted up to 26% in the Insurance sector under the automatic route subject to obtaining license from Insurance Regulatory and Development Authority. This FDI limit should be increased to 49%.

Indefinite Carry forward and set off of losses to Insurance companies

Currently, Companies are allowed to carry forward and set off loss for 8 years from the end of the relevant assessment year. However, the Insurance sector should be allowed to carry forward and set off the loss for an indefinite period, as envisaged in the Draft Direct Tax Code Bill.

Reduction in Corporate Tax Rate

The present effective corporate tax rate of 33.99% comprises of basic rate of 30%, surcharge of 10% on basic rate and cess of 3% on basic rate and surcharge (30%+3%+0.99%). It is expected that the surcharge and cess will be abolished this year for corporate sector reducing the effective corporate tax rate to 30%. This will be a step in the direction of moving to the target tax rate of 25% envisioned in the draft Direct Tax Code.

Disallowances under Section 14A

Section 14A read with Rule 8D deals with disallowances of expenditure incurred in relation to exempt income. As dividends from domestic companies are exempt from tax and banks have significant investments, it has resulted in genuine hardship to banks. The conversion of DDT in to a withholding tax will eliminate the disallowance under section 14A in respect of interest and other expenses incurred for investment in shares and units. 

Abolition of Security Transaction Tax

Security Transaction Tax should be abolished as envisaged in Direct Tax Code Bill.

The author Dr Suresh Surana is Founder, RSM Astute Consulting