Union Budget 2023: Budget 2023: Boosting stability in financial sector amidst global uncertainty

India’s budget comes at a time when the world is grappling with geopolitical uncertainties, headwinds in the form of slowing growth and high inflation, despite measures taken by central banks and governments across the globe. While India has emerged as one of the bright spots in world economy, it is not isolated from these macro-economic headwinds and possibility of an economic slowdown looms larger than ever.

Coincidently, Union Budget 2023 would be the last full-fledged budget of the current Government before the 2024 Lok Sabha elections and stakeholders would eagerly await cues from the upcoming Union Budget 2023-24. The Government kicked off its annual Budget preparation exercise for Financial Year 2023-24 on October 10 and is expected to look for ways of reviving growth amid a gloomy global outlook. The market is expecting the Government to continue its thrust on infrastructure and CAPEX spend to give an impetus to growth, while maintaining the path of fiscal prudence.
(Tax breaks, jobs or plan to beat China: What will Budget 2023 offer? Click to know)

“Growth priorities will be kept absolutely on the top for the upcoming Budget 2023”, Sitharaman said during a fireside chat at an industry forum in Washington, DC. Inflation concerns will have to be addressed, while at the same time momentum cannot be weakened, which would be the point of balance. So, it will have to be a carefully structured Budget in which the growth momentum would have to be maintained, she added.

The financial services sector is the backbone of any economy as it responds dynamically to movements in the global economy. The financial sector is hoping that the Government shall announce some pathbreaking reforms to propel growth in the sector.

It is expected that the Indian government will try to simplify the structure of the capital gains tax regime including rationalizing the holding periods and rates for investments across equity, debt and other asset classes. Example, the holding period (for classifying a long-term capital asset) of financial products like bonds, debts funds, gold ETF may reduce from 36 months to 24 months.

International Financial Services Center (IFSC), India’s first global financial services hub, is fast emerging as an attractive destination for financial services players. Some of the key tax considerations which the Government may address in the upcoming Budget session to make IFSC more attractive include a separate regime for taxation of funds in IFSC, increasing the tax holiday period, complete exemption from Minimum Alternate Tax (MAT) liability, specification. of certain objective criteria for fund managers in order to address likely invocation of GAAR provisions and provide certainty, etc.

Rationalization of the headline corporate tax rate for foreign companies has been a long standing ask. Currently, the foreign bank branches are subject to corporate tax of 40 per cent, while the headline corporate tax rate for domestic companies is reduced to 22 per cent. With the abolition of dividend distribution tax, there is certainly a need to bring parity between tax payable by domestic and foreign players thereby providing a level playing field in sectors such as banking, thereby promoting ease of doing business and attracting more foreign capital. Non-Banking Finance Companies (NBFCs) play an important role in providing need-based credit to un-banked and under banked segment of the society. With the recent revision in regulatory framework of NBFCs, there has been convergence in the regulations of NBFCs and banks.

On same lines, the Budget should address the concerns raised by NBFCs in terms of effecting parity in taxation on par with banks. Example: Exempting NBFCs from (i) applicability of TDS on interest income (ii) thin-capitalization provisions which put a cap on deduction of interest expenses; and (iii) provisions of section 269ST and 269T of the Act, pertaining to loan repayments, etc.

Growth of fintech sector is critical for digitization of financial services to happen across India including rural areas. The fintech sector expects more assistance from the government for better partnerships with the banks to strengthen the existing model especially in areas like workability of first loan default guarantee (FLDG) provisions without diluting the objective of digitization. Similarly, for a more comfortable and faster growth plan, the fintech sector expects liberalization of both direct tax and GST rates for the next few years.

There are whole lot of opportunities in sectors like carbon trading, crypto markets and mass tokenization of financial assets. Government is expected to come up with appropriate tax exemptions and simplification of provisions for various stakeholders involved in the financial services sector so that there is effective impetus for these emerging areas to grow in a more meaningful way.

Lastly, the Government should consider simplification of some of the TDS/TCS provisions. For example, provisions relating to TDS on benefits and perquisites under section 194R, which have resulted in practical challenges for financial sector entities, increase the cost of compliances for financial sector companies and goes against the principle of ease of doing business in India.

All eyes are now on the budget announcements to see how many of these expectations are effectively addressed and the quantifiable impact it is likely to have on various businesses and earnings in the financial services sector.

(Sunil Badala is Partner and Head, Financial Services, Tax, KPMG in India. Rahul Jain is a Chartered Accountant)


Leave a Comment

Your email address will not be published. Required fields are marked *