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Overview
Budget 2010 was focused on achieving fiscal consolidation without hampering growth prospects for the Indian economy. The Finance Minister in his speech clearly stated that the “Union Budget cannot be a mere statement of the Government accounts. It has to reflect the Government’s vision and signal the policies to come in future”. To this extent, Budget 2010 has achieved its objective. It has also met expectations of the financial services sector in ensuring it clearly lays down its vision for fiscal consolidation and Governmental borrowing – both key to the industry’s fortunes.
Accordingly, Budget 2010 must be viewed in the context of its policy level announcements and proposals rather than merely a review of its tax proposals. In the ensuing paragraphs, we have summarized the key announcements by the Finance Minister in presenting the Budget 2010 to the extent they are relevant to the financial services sector.
Policy announcements
Regulatory structure
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The Government proposes to set-up an apex-level Financial Stability and Development Council to monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates and address inter-regulatory co-ordination issues. The Council will also focus on financial literacy and financial inclusion. The Council is not expected to prejudice the autonomy of the existing regulators
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A Financial Sector Legislative Reforms Commission is to be established to rewrite and clean up the financial sector laws to bring them in line with the industry’s requirements
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Banking policy initiatives
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The Government’s focus for the banking sector is to ensure that the banking system grows in size and sophistication while expanding geographic coverage and improving overall access to banking services. The Finance Minister announced that the RBI is considering granting additional bank licenses to private sector players and NBFCs (subject to the applicants meeting RBI’s eligibility criteria) to improve overall access to banking services
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The Government proposes to capitalize Public Sector Banks with a sum of INR 165 billion to help the banks maintain a minimum 8 percent Tier I Capital by March 31, 2011
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It is also proposed that the Government will recapitalize Regional Rural Banks to help strengthen their financial positions, thereby enabling them to support increased lending to the rural economy
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Banks will also be directed to provide (i) appropriate Banking facilities to small habitations having population size in excess of 2,000 by March 2012; and (ii) insurance and other services to targeted beneficiaries in under-banked areas through the use of Business Correspondents and other models with appropriate technology back-ups
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The Government, RBI and National Bank for Agriculture and Rural Development (NABARD) will collectively contribute INR 1 billion to each of the Financial Inclusion Fund and Financial Inclusion Technology Fund
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The corpus of the Micro-Finance Development and Equity Fund has been doubled to INR 4 billion; the fund aims at linking Self-Help Groups with the banking system
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Other policy announcements
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The Government had set up India Infrastructure Finance Company Ltd (IIFCL) in 2006 to provide long-term financial assistance to infrastructure projects. IIFCL is expected to disburse INR 200 billion by March 2011. It is also expected to double refinance extended to banks, towards their lending for infrastructure projects, during the year 2010-11
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In the last Budget, the Government had directed IIFCL to work with banks to evolve a ‘take-out financing’ scheme which could facilitate incremental lending to the infrastructure sector and effectively address the asset-liability mismatch of banks from financing infrastructure projects. It is expected that this scheme will provide finance of about INR 250 billion in the next 3 years
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The Government proposes to formalize a symbol for the Indian Rupee to give it a clear distinguishing identity. The symbol will reflect the Indian ethos and culture
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Tax proposals
Direct taxes
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The Finance (No 2) Act, 2009 had amended the First Schedule to the Income-tax Act, 1961 thereby providing that in case of non-life insurance companies, any appreciation of or gains realised from investments that are taken credit for in the accounts of the company shall be treated as income in their hands and subjected to tax. However, the Insurance Regulatory Development Authority (IRDA) regulations do not allow a non-life insurance company to include in its profits, any appreciation in the value of its investments as they are in the nature of unrealized gains. To address this anomaly, Budget 2010 proposes that the unrealized gains arising to a non-life insurance company from an appreciation in the value of investments will not be included in its total income. Similarly, the Budget proposes that no deduction will be allowed for provision for losses due to a diminution in the value of investments as they are not realized losses. It has also been provided that any gains/losses on realization of investments will be adjusted from the computation of total income of the non-life insurance company, if the gains/losses are not already credited/debited to the profit and loss account of the company
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The threshold limit for withholding tax on payments in the nature of insurance commission, to be paid to residents, is proposed to be enhanced from INR 5,000 to INR 20,000
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Individuals and HUFs investing in long term infrastructure bonds (to be notified) will receive an additional tax deduction of INR 20,000
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Indirect taxes
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Under ULIP schemes, the fund management charges were made liable to service tax with effect from May 16, 2008. Service tax was payable on the premium amount less the risk cover amount and the actual investment amount. Budget 2010 now proposes a change in the method of computation of the value on which the service tax would apply. It is proposed that such value would be the higher of the actual fund management fee charged by the insurer, or the maximum amount of fund management fee capped by the IRDA
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For services to qualify as ‘export’ under the Export of Services Rules, 2005, the following two important conditions (among others) need to be satisfied: (i) that services are provided from India, and (ii) services are used outside India. In recent years, these conditions (specifically ‘used outside India’) have been a matter of dispute. Further, demonstrating that such conditions are fulfilled has been a challenge given that services are intangible in nature and therefore evidence of delivery or consumption was difficult to prove. As a consequence, ‘export’ claims were not accepted, and tax demands were raised on services claimed as ‘export’. Moreover, this was also an impediment in obtaining refund of CENVAT credit of duties/taxes paid on inputs/input services. In a significant move to relax the conditions for ‘export’ characterization, both the above conditions ie ‘provided from India’ and ‘used outside India’ have been deleted with immediate effect. Therefore, the only additional condition to be met (in addition to the basic condition applicable to particular service categories), would be that the consideration is received in convertible foreign exchange
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Notification 5/2006 provides the conditions for claiming refund of CENVAT credit of duties/taxes paid on inputs/input services by the service exporters. However, there was an inconsistency in the wording used in Notification 5/2006 as compared to the CENVAT Credit Rules, 2004. To facilitate grant of refunds to service exporters, Notification 5/2006 has been amended to the effect that conditions in the Notification 5/2006 have been aligned to the conditions in the CENVAT Credit Rules, 2004. Also, refund of credits availed during the period prior to the quarter in which refund is claimed would be allowed. A detailed declaration (in prescribed format) providing details of exported services and CENVAT credit availed has to be submitted along with refund application. This declaration has to be certified by the Auditor of the service exporter (Chartered Accountant). A stated intention is to formalize the recent Circular 120/01/2010-ST dated January 19, 2010 issued by Tax Research Unit of Department of Revenue |
Concluding remarks
Budget 2010 has largely remained focused on macro-economic issues and not delved into addressing any industry specific concerns. Hence, long-standing expectations of the financial services industry including, inter-alia, equal tax treatment for NBFCs as in case of banks, complete tax pass through status for venture capital funds, clarity on characterization of securities trading income, regulatory clarity on investment avenues for registered foreign venture capital investors, liberalization of FDI in the insurance sector and rationalization of costs for the capital markets have largely remained unaddressed. However, the upside from the policy announcements is that once the macro issues are addressed the Finance Minister will be able to focus on the specific industry issues in the near future.
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