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Accepting a long standing demand of industry, the Centre proposes to allow non-banking finance companies (NBFC) to avail tax deduction on the provisions they make towards bad debts.
The Union Budget 2016-17, presented on Monday, has allowed NBFCs to claim tax deduction on account of provision for bad and doubtful debts to the extent of 5 per cent of total income.
Reacting to the Budget announcement, Raman Aggarwal, Chairman, Finance Industry Development Council (FIDC), said that the proposal to allow NBFCs to claim tax deduction is a welcome move.
“We welcome this move. However our demand to bring parity with banks on taxation issues relating to NPAs has not been fully met," Aggarwal told BusinessLine .
FIDC is a self regulatory body representing asset financing NBFC.
In the case of NBFCs, the current legal framework does not allow tax deduction on the provision made for non-performing assets. However, banks are permitted to claim tax deductions for such provisioning. This has put NBFCs at a disadvantage.
Even after the latest Budget announcement, NBFCs and banks are not on par as regards the extent of deduction they could avail for provisions made on NPAs. For banks, the limit is capped at 7.5 per cent of total income, while it has been proposed at 5 per cent for NBFCs.
Aggarwal also said that Budget had not addressed FIDC’s associated demands for income recognition norms on NPAs and exemption from TDS provisions on interest component of equated monthly instalments (EMIs).
During the pre-budget meeting held with the Finance Minister Arun Jaitley and his team in January this year, FIDC had demanded that NBFCs be brought in sync with banks on the aspect of tax matters.
Just as the revised regulatory framework for NBFCs had ushered in parity with banks, there is a need to bring parity on tax matters too, FIDC had suggested.
Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a CA firm, said that NBFCs have now been allowed to claim a deduction up-to 5 per cent of the total income on account of provision of doubtful debts.
“Though this has been a long standing demand to treat the provision of bad debts of NBFCs at par with that of Indian banks in terms of tax deduction, it has only been partially met as the prescribed percentage is less than that allowed for banks. Still, this is a positive development for NBFCs and this amendment would reduce the tax outgo for NBFC and providing them a much sought after relief especially in these rising NPAs scenario," Maheshwari said
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