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Service tax exemption on loan processing fee can be a breather
February, 26th 2013

The microfinance industry is hoping that the Union Budget will exempt the loan processing fee from service tax and give tax concession on 40 per cent of their profits.

In microfinance, service tax is applicable on the loan processing fee, which is typically one per cent of the loan amount. As the average loan size is small (about Rs 8,000 per loan), a service tax exemption will make life easier for the industry and its customers.

“The relief from service tax can be then passed on to the customers,” said Alok Prasad, CEO, Microfinance Institutions Network.


The second expectation of MFIs from the Budget is that they be given tax concessions to the extent of 40 per cent of their profit, akin to housing finance companies and infrastructure companies under Section 36(1) of the Income Tax Act.

“Similar benefit will help the microfinance companies to retain earnings and build networth,” Prasad said.

The industry is hoping that the Government will provide some critical support this Budget to enable MFIs to function effectively.

The MFIs also expect the Government to increase the corpus of the Microfinance Equity Fund, which is operated by the Small Industries Development Bank of India (SIDBI).

The Rs 100-crore fund was set up by the Government in 2011-12 and the same has been committed fully, Prasad informed.

SIDBI uses the fund for extending equity or any other form of capital for MFIs.


The MFI industry is awaiting the Micro Finance Institutions (Development and Regulation) Bill - 2012 to be enacted into a law.

The wait for microfinance companies is likely to get longer at least till the monsoon session as the Bill has not been listed for business in the on going Budget session.

A Standing Committee of Parliament is reviewing the Bill, which elaborates on the role of MFIs as facilitators of credit and other microfinance services to the poor.

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