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NBFCs seek I-T benefits on bad loan provision
February, 27th 2008
Asset financing non-banking finance companies (NBFCs) have asked the finance ministry to extend income tax benefits to them from provision against non-performing assets (NPAs).
 
Under the existing terms of the IT Act u/s 36(1)(viia), a provision for bad and doubtful debts by banks and financial institutions is allowed as a deduction to the extent of 7.5 per cent from the gross total income.
 
Alternatively, such banks and FIs have been given an option to claim a deduction with respect to any provision made for assets classified by the Reserve Bank of India as doubtful assets or loss of assets to the extent of 10 per cent (increased from 5 per cent) of such assets.
 
Though NBFC-AFCs are required to make provisions for NPAs, such provisions are disallowed by tax authorities when assessing their income tax liabilities.
 
These provisions made against NPAs are in the nature of business expenses incurred wholly and exclusively for business operations by an NBFC-AFC and therefore, these provisions should be allowed to be deducted while arriving at the taxable profits of NBFC-AFCs. Any recovery made against these allowed provisions would automatically get taxed later on, said the pre-budget memorandam from the NBFC sector.
 
On the indirect tax front, the sector has asked for exempting the total interest component in a lease/hire-purchase transaction from the levy of service tax so that only the management fee/processing charges are subject to the levy, as in the case of a loan transaction.
 
In 2006, the finance ministry had exempted 90 per cent of the interest component in a lease/hire-purchase transaction from service tax, while 10 per cent of the finance charges/interest component is still subject to service tax.
 
The sector has argued that the levy of service tax at 12.24 per cent even on the 10 per cent of interest component makes lease/hire-purchase costlier to the borrower and so economically unfavourable compared to a loan transaction, where 100 per cent of the interest component is exempted from service tax.
 
NBFC-AFCs have also asked for extending to them the SARFAESI Act and Debt Recovery Tribunals. Currently, banks, financial institutions, housing finance companies have been notified under the SARFAESI Act, giving them the ability to move against defaulting borrowers and secure their assets. AFCs are the only segment of the financial sector that have not been notified under the Act.
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