In a big boost to the insolvency regime, the Central Board of Direct Taxes (CBDT) has granted tax exemption to certain specified incomes of the insolvency regulator IBBI for five financial years starting from the current fiscal.
The exemption will be available with respect to the financial years 2022-2023, 2023-2024, 2024-2025, 2025-2026 and 2026-2027, the CBDT said in an order.
The specified incomes of IBBI that are now exempted from income tax are Grants-in-aid received from Central Government; Fees received under the IBC; Fines collected under the IBC and any interest income on these receipts.
The enactment of Insolvency and Bankruptcy Code (IBC) in the year 2016 was seen as one of the success stories of Indian economic reforms. This is because IBC has been playing a critical role in reshaping the behaviour of borrowers.
The income tax exemption comes at a time when the IBBI has taken efforts to shore up its finances and reduce dependence on Centre’s grant in aid.
Fee incomes
It maybe recalled that IBBI had last September imposed a regulatory fee of 0.25 per cent on corporate insolvency resolution plans (CIRP) as part of its overall efforts to shore up its finances and reduce dependence on the Centre’s grants-in-aid.
The regulatory body had also imposed a 1 per cent regulatory fee on third-party service providers and professionals appointed by IPs.
The regulatory fee of 0.25 per cent — which came into effect from October 1 last year — is being applied on the realisable value to creditors under the resolution plan, and only in those cases where the amount of the resolution plan exceeds the liquidation value.
Last June, IBBI issued a discussion paper, declaring its intent to impose a regulatory fee of 0.25 percent of CIRP value.
A back of the envelope calculation showed that if the average aggregate corporate insolvency resolution plan approved every year through the IBC is about ₹40,000 crore (it has been over this level in the last two years), then the IBBI will end up pocketing at least ₹100 crore under this head.
This is being seen as huge windfall for the regulator, who is now recording receipts of about ₹5 crore a fiscal, said some insolvency experts.
IBBI’s expenditure
Prior to the levy of 0.25 % regulatory fee, IBBI was only meeting 20 per cent of its operational expenses from the fee it levies, and the rest was met by grants-in-aid received from the Central government.
The IBBI’s expenditure has only increased through the years, and this trend is expected to continue with the introduction of pre-pack and cross-border insolvency mechanisms. This fee will ensure that this anticipated increase in the expenditure of the IBBI is covered and it will also allow the regulator to steadily reduce its reliance on Central government fund.
Many industry experts however felt that the IBBI move to impose a regulatory fee smacked of a regulatory tax and is inherently fraught with “conflict of interest”. This will put a burden on industry and ultimately on the consumer, they said, adding that it was unfair to expect regulatory fees for a regulatory body to perform sovereign functions.