With the world experiencing an unprecedented contraction in the economy and loss of human lives as a result of the pandemic, the finance minister had a tough task ahead of her in terms of developing a budget that focused on economic growth while balancing many variables at play. The Union Budget has been well-received, judging by the stock market performance.
Impact on the BFSI sector (non-tax related)
- The constitution of asset reconstruction company/asset management company (ARC/AMC) in the banking sector to transfer bad loans is a thoughtful reform and would enable a reduction in the stress caused in banking on account of the non-performing assets (NPAs). The transferred assets would be separately dealt with by such ARC/AMC, following a process similar to a company in the business of ARC, which generally involves acquiring, managing and disposing of bad loans and stressed assets.
- To further restore the confidence of retail depositors in the banking industry, effective implementation framework would be in place, whereby the depositors would be able to withdraw amounts up to INR 5 lakh against their deposits, which now stand insured under the Deposit Linked Insurance Scheme. The success of this initiative can be measured only when the process of deposit withdrawal is seamless and agile, given that depositors during such times face a lot of stress as they have a home to run and living expenses to be incurred.
- An increase in the FDI limit to 74% in the insurance industry is a welcome change, where control and significant ownership can rest with foreign JV partner/s with specific safeguards, such as the majority directors to be Indian residents and where 50% of the board to comprise of independent directors. There could be certain restrictions in relation to retaining a portion of distributable profits under general reserves. It would be worth watching how many global insurance players could be keen to take the benefit of this reform.
- An outlay of INR 20,000 crore has been proposed to further capitalise the public sector banks (PSBs), which would continue to ensure improvement in their financial health and provide easy capital to them during the difficult times they have been going through on the capital adequacy front.
- The privatisation of one Public Sector Insurance Company is a great step towards demonstrating the open-mindedness of the government to focus on its privatisation endeavour and would enable a better platform for this company to effectively compete with private players in the industry.
- Life Insurance Corporation of India to come out with an IPO is a major disinvestment decision within the BFSI sector. A very small percentage of such disinvestment would enable a significant cash inflow for the government and could constitute a major portion of the modest number of INR 175,000 crore of disinvestment income budgeted.
- There is a proposal to consolidate the SEBI Act, 1992, the Depositories Act, 1996, the Securities Contract (Regulations) Act, 1956 and the Government Securities Act, 2007 into a rationalised single securities market code. This would streamline multiple laws, ordinances, guidelines and regulations and lead to an ease in the implementation of the statute and will be easy from an administrative standpoint. The text of the code has not yet been notified.
- Debt financing by FPIs has been proposed to enable easy access of finance to InvITs and REITs for augmenting funds in the infrastructure and real estate sectors.
Impact on taxation in the BFSI Sector
- The investment made in the Unit Linked Insurance Plan (ULIP) would now be taxable on maturity where the annual premium or aggregate of all premia paid by a person in respect of ULIP policies exceeds INR 250,000 in a fiscal year. This would be applicable on policies taken on or after 1 February 2021 and further, non-concessional ULIP policies shall be treated as capital assets and liable to capital gains tax on maturity as equity-oriented funds.
- Royalty income received by a non-resident on account of the lease of aircraft, paid by a unit in IFSC, would be exempt from income tax in India.
- Tax holiday for a period of 10 years on the transfer of asset being an aircraft or an aircraft engine, leased by a unit in International Financial Services Center (IFSC) to a domestic company engaged in aircraft operations.
- Tax exemption to the investment division of a banking unit of a non-resident located in an IFSC.
- Tax exemption for income earned by a non-resident on transfer of non-deliverable forward contracts entered into with an offshore banking unit of IFSC.
- Tax neutral relocation of the existing offshore fund to IFSC.
- For FPIs, tax to be withheld at source on dividend income received from Indian companies, either at a rate as per the Double Tax Avoidance Agreement (DTAA) or the Act, whichever is lower.
- Advance tax liability on dividend income to arise only after declaration of dividend
- No tax would be withheld on dividend income paid to a REIT/InvIT by a special purpose vehicle. This amendment is proposed to be effective retrospectively from
1 April 2020.
Significant misses in the Union Budget
- A very important miss on the indirect tax side has been in relation to the reduction of GST on the medical insurance premium, which was a significant expectation of the industry. Given the emphasis of the budget on the importance of healthcare and well-being, a reduction of the GST rate from 18% to 12% could have further benefitted the insurance industry and made medical insurance premiums more affordable in the hands of the insured.
- While some reforms did exist for non-banking finance companies (NBFCs) with a minimum asset size of INR 100 crore, the liquidity window facility for NBFCs was not directly addressed and therefore some focus there could have helped prioritise this issue.
- While the rationalisation of the deposit insurance framework is a welcome reform, there is a need to focus on the special resolution framework for financial institutions that are currently not existing. An attempt in the form of the Financial Resolution and Deposit Insurance (FRDI) Bill was made in the past.
- The Indian branches of foreign banks were looking out for rationalisation in their tax rate. They were hoping that the current rate of 40% tax levied on them could be reduced to a rate as applicable to a domestic bank in India. If this was addressed, it could have been a major tax reform in the banking sector, given that many foreign banks are operating in India through their Indian branches and offices.
Vivek Iyer is Partner, Grant Thornton Bharat LLP and Khushroo B. Panthaky, Chartered Accountant, Mumbai