The balance sheet of the NBFC sector grew by 17.9 percent from Rs.26.18 lakh crore to Rs.30.85 lakh crore during 2018-19. The Return on Assets (RoA) of the NBFC sector decreased to 1.5% as on March 2019, from 1.6% as on March 2018. Further, the Return on Equity (RoE) moderated to 6.6% as on March 2019, from 6.9% as on March 2018.
The Economic Survey for FY 2019-20
Deployment of credit by mutual funds to NBFCs has been contracting since October 2018. An observable shift in the sources of funding of NBFCs, due to which bank borrowings increased from Rs.5.62 lakh crore in October 2018 to Rs.7.13 lakh crore in October 2019 i.e. a growth of 26.8 percent.
At end of March 2019 and September 2019, CRAR of NBFC sector remained at 19.5 percent. The gross NPA increased to 6.3% at end September 2019 from 5.8% at end of March 2018. The net NPA ratio marginally increased from 3.3 percent in March 2018 to 3.4 percent in March 2019 and remained same as on September 2019.
The Hon Finance Minister Ms. Nirmala Sitharaman presented Budget 2020 in Parliament on 1 February 2020.
Major Policy Initiatives for Non-banking Finance Company (NBFCs)
• Limit for NBFCs to be eligible for debt recovery under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002, to be reduced from Rs.500 crore to asset size of Rs.100 crore or loan size from existing Rs.1 crore to Rs.50 lakh.
• A mechanism to be devised, to further support liquidity to NBFCs by guaranteeing securities floated by NBFC under the Partial Credit Guarantee scheme.
• Necessary Amendment to the factoring Regulations Act 2011 to enable NBFCs to extend invoice financing to MSMEs through TReDs
Major Tax Reforms
General tax changes proposed in the Budget 2020 have not been covered hereinafter and those that have specific implications or relevance to NBFC sector are covered.
• Concessional rate of tax deducted at source (TDS) of 5% on interest in respect of monies borrowed by an Indian company from a source outside India (by way of foreign currency loans/bonds, rupee denominated bonds (RDBs)) which is currently applicable only for borrowings before 1 July 2020 has been proposed to be extended to borrowings before 1 July 2023 (Section 194LC).
• TDS of 4% is proposed to be applicable, on interest payable to a non-resident, in respect of moneys borrowed in foreign currency from source outside India, by way of issue of long term bond or RDB on or after 1 April 2020 but before 1 July 2023 and which is listed only on recognised stock exchange located in International Financial Service Center (IFSC).
• Concessional rate of TDS of 5% on interest in respect of investments made by Foreign Institutional Investors (FII) and Qualified Foreign Investors (QFIs) in government securities and bonds which are currently applicable for interest income earned before 1 July 2020 has been proposed to be extended to interest income earned before 1 July 2023 (Section 194LD.
The aforesaid concessional rate of TDS also proposed to be applicable on investment made in municipal debt security on or after 1st April, 2020 but before 1st July, 2023.
• The provisions deeming the stamp duty value as sale consideration i.e. section 43CA, section 50C, section 56(2)(x), in relation to transfer of land or building or both, are proposed to be amended to increase the safe harbor relief from 5% to 10% of the sale consideration. The amendment to take effect from assessment year 2021-22.
• Section 194J to be amended to provide for a reduced rate of TDS of 2% as against 10% on payment to a resident by way of fees for technical services. Rate of TDS in other cases (including payment made for professional services) continue to remain at 10%.
• It is proposed to charge Commodity Transaction Tax (CTT) on new commodity derivative products w.e.f. 1 April 2020, as under:
|sale of a commodity derivative based on prices or indices of prices of commodity derivatives
|Sale of an option in goods, where option is exercised resulting in actual delivery of goods
|sale of option in goods, where option is exercised resulting in settlement otherwise than by actual delivery of goods
The definition of taxable commodities to be amended to include 'sale of option in goods' and 'sale of commodity derivatives based on prices or indices of prices of commodity derivatives' and the term 'recognised association' to be replaced by 'recognised stock exchange'.
• No dividend distribution tax (DDT) shall be payable by the Company on dividend declared, distributed or paid on or after 1 April 2020. Consequently, dividend income shall be taxable in the hands of the shareholder. Further, dividend income received by a unit holder from business Trust shall be taxable in the hands of the unit holder. The above amendments to be effective from assessment year 2021-22.
• Section 55 defining cost of acquisition and cost of improvement to be amended to provide that in case of a capital asset, being land or building or both, the fair market value (FMV) as on 1 April 2001 shall not exceed the stamp duty value of such asset on the said date, where such stamp duty is available.
Some of the expectations of the NBFC sector from this Budget 2020 on tax proposals, for a level playing field with banks on the following aspects, have not been addressed in the Budget:
• Section 43D was amended vide Finance Act (No. 2), 2019 to include deposit-taking NBFCs and systemically important non deposit-taking NBFCs. However, NBFCs, implementing Indian Accounting Standards (Ind AS) accrue interest income on Stage 3 loans and credit it to the profit and loss account. The Ind-As implementation for banks have been differed. Thus, the interest income for an NBFC becomes taxable in the year of accrual as per section 43D of the Act. Amend section 43D to substitute the word 'credited' by "receipt".
• Section 194A of the Act, be amended to exclude NBFCs from the list of deductee, so that person making payment of interest (other than interest on securities) to NBFC shall not be required to deduct tax at source.
• Section 94B of the Act was inserted to counter cross-border shifting of profits through excessive interest payments arising from high levels of debt in a company. Banks are exempted from the provisions of section 94B keeping in view the special nature of their business. NBFCs owing to the similarity of their business as that of banks, be treated at par with banks and be exempted from the provisions of section 94B of the Act.
• A framework should be issued for the taxability of the returns/distributions from perpetual bonds issued by the Indian NBFC, to avoid unnecessary litigation
The government has introduced measures to provide liquidity to the NBFCs but further tax relief and other measures are required to accelerate financial stability, credit growth, etc. for NBFC.
Information for the editor for reference purposes only
Bahroze Kamdin, Partner - Deloitte India. Vidya Mallya is Senior Manager and Dharmil Shah is Deputy Manager with Deloitte Haskins and Sells LLP