CBDT clarifies its stand on section 269ST – NBFCs will breathe a sigh of relief

 

Abhirup Ghosh

abhirup@vinodkothari.com

One of the major highlights of the Finance Budget 2017 was the introduction of section 269ST of the Income Tax Act, 1961. The section was introduced with an intention to curb black money by reducing the scope of large ticket size cash transactions in the economy. As per the provisions of the section, no person can accept an amount of Rs. 2 lakhs or more:

  1. In aggregate from a single person in a day;
  2. In respect of a single transaction;
  3. In respect of transactions relating to one event or occasion from a person.

This section affected several businesses in the country, financial entities in particular. During the course of business, financial entities, like NBFCs, often accept repayments through cash, even though they lend out through banking channels, and this section was a certainly something to worry about.

There was a notion that if a loan is a transaction, then the instalments received against such loan transaction would have to be aggregated for the purpose of this section. This however was an unrealistic presumption because if one were to take a view that all payments made by the borrower under a loan contract will need to be aggregated, the amount that can be paid in cash, to avoid the applicability of the section, under clause (a) and under clause (b), will become completely disproportional. Clause (a) will capture the payments made in a single day, whereas the clause (b) will capture payments made over the tenure of the loan. Such wide amplitude is not the intent of the law.

For instance, if there is an invoice of Rs 3 lakhs, which is paid over three tranches, over 3 days, all in cash, the section shall get attracted. However, where there is an invoice, which is payable in 12 monthly instalments, one cannot argue that all the 12 instalments relate to a single transaction, and therefore, need to be aggregated.

Therefore, in the given example of extending of loan and accepting repayments in multiple instalments, loan extended and each of the instalments accepted must be treated as independent transactions for the purpose of section 269ST and must not be seen on a cumulative basis.

Subsequent to the introduction of the section, the Central Board of Direct Taxes received representation from several financial institutions, pursuant to which it came out with a clarification on 3rd July, 2017[1] stating:

…it is clarified that in respect of receipt in the nature of repayment of loan by NBFCs or HFCs, the receipt of one instalment of loan repayment in respect of a loan shall constitute a ‘single transaction’ as specified in clause (b) of section 269ST of the Act and all the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions section 269ST.

Therefore, henceforth, for the purpose of section 269ST, NBFCs and HFCs will not have to aggregate all the instalments received in cash against a single loan transaction to see if it exceeds Rs. 2 lakhs or not. Each instalment will be treated as a separate transaction. So, if a single instalment of say, Rs. 3 lakhs, is split in two halves and paid in cash over 2 days, then this section will get attracted.

The position after this circular can be explained through the table below:

Instance Applicability of section 269ST
Loan of Rs. 3 lakhs – EMIs of Rs. 50,000 paid over 6 months in cash Not applicable
EMI of Rs. 300,000 split into two halves and paid in cash over two days Applicable
EMIs against more than one loan transactions in a single day from a single person aggregating to more than Rs. 2 lakhs Applicable

 

After this clarification, the NBFCs and HFCs will breathe a sigh of relief as this was going to affect their business seriously.

[1] http://www.incometaxindia.gov.in/communications/circular/circular22_2017.pdf

GST implications for sale of repossessed assets, by Nidhi Bothra

Lending is always to good borrowers but often the good borrowers become bad borrowers. Thus, the business of lending brings with it the trouble of enforcement of security interests as well. The repossession of the collateral asset and eventual sale for recovery of the losses due to default are a common phenomenon in lending business. This article deals with the GST implications for sale of repossessed assets. Read more

“Should we get an MFI license?”

We often get clients asking us the question, do we need an MFI licence or is it enough to get an NBFC Loan Company licence? After all, the client reasons, being an MFI is simply to be under a tigher regulatory and compliance regime. This article seeks to outline the key pros and cons of both. Read more

NPA Clearance Mission on: Big ticket NPAs to face action under Banking Ordinance as committee recommends referral, by Vallari Dubey

On 13th June 2017, RBI released a press release titled, “RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC)[1], specifying the recommendations issued by an Internal Advisory Committee (IAC), which constituted in furtherance of the powers laid  down by the NPA Ordinance. Read more

GST loom on guarantee services, by Nidhi Bothra

Related party transactions always follow the presumption of not being at arm’s length and therefore tax provisions prescribe that the transactions should be undertaken at market value and be based on usual commercial terms, as if done with a third party. Transactions with related parties are always subject to scrutiny and are required to demonstrate that the transactions are driven by commercial understanding. The GST regime also prescribes for Read more

Directions on IT Framework for the NBFC Sector – RBI keen on implementing several operational requirements, by Anita Baid

In the era of technology, Information Technology (IT) aids plenty of resources to enhance the credit system of the country. Over the years, the Non-Banking Finance Company (NBFC) sector has grown in size and complexity. As the NBFC industry matures and achieves scale, its Information Technology /Information Security (IT/IS) framework, Business continuity planning (BCP), Disaster Recovery (DR) Management, IT audit, etc. Read more

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Action Plan for NPA Ordinance -Sequel 2, by Vallari Dubey, 24th May, 2017

Complementing the Ordinance on Non-Performing Assets (NPA)[1] which originally brought a whole new breeze in the resolution space in India, RBI has come up with a press release as a further to the first step in crystallizing the concept as laid down in the Ordinance.  RBI has brought a lot of changes for the purpose of implementation of the NPA Ordinance. The Sequel two in the Ordinance story has been released in form of a press release by RBI dated 22nd May 2017, laying down the Action Plan to implement the NPA Ordinance[2].

Points of Action as Tendered

The Action Plan brings forth the relevant steps needed to be taken to arrange for resolution of stressed assets in the Banking Industry. Accordingly, the RBI proposes to set in the following important issues:

Modifications in and re-emphasizing the JLF Mechanism[3]

(i) It has been clarified that a corrective action plan could include flexible restructuring, Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A).

(ii) Amongst the changes being made for the aforementioned proposal, a quantum of changes has been in the JLF Mechanism. In line with the same, a latest notification by RBI has modified the existing quantitative criteria required under JLF mechanism to approve a resolution plan. By virtue of which, following changes have been effected:

Consent required for approval of proposal under JLF
Particulars Before RBI Notification w.e.f RBI Notification
By value 75% 60%
By number 50% 50%

(iii) Such banks who did not give their consent on the proposal approved by the JLF have to either exit by complying with the substitution rules within the stipulated time or adhere to the decision of the JLF.

(iv) Participating banks have been mandated to implement the decision of JLF without any additional conditionality to avoid any kind of red-tapism and fulfill the purpose of Corrective Action Plan under the said mechanism.

(v) The Boards of banks were advised to empower their executives to implement JLF decisions without further reference to them, which is again to avoid any unwanted delay in implementation of the proposal.

Oversight Committee

The Apex Bank proposes to revamp the existing Oversight Committee (OC) which currently comprises of two members only. Where the original committee was formed by the Indian Banks Association (IBA) in consultation with RBI, the reconstituted OC shall be under the direct guidance of RBI and is expected to consist of more members. A larger body shall be able to help dealing with the volume of cases referred to OC, which seems to be beyond those under S4A as required currently.

Resolution Framework under IBC

The most crucial part of the Action Plan is supposedly formulating a formal framework, which was the sole intent behind the original NPA Ordinance. The framework is expected to establish a seamless mechanism to deliberate and take actions to refer cases for resolution under IBC. A committee shall be formed to devise and advise requisite plan and strategy for the matter which shall consist of Independent Board Members.

Rating Assignments

Additionally, RBI through this release of action plan, schemes out the suggestion to include the option of rating assignments. RBI believes that credit rating agencies ought to play an important role in the scheme of things. Rating assignments may help preventing rating-shopping or any conflict of interest that may arise otherwise and also exploring for the possibility for the payment to be made for from a fund to be created out of contribution from the banks and the Reserve Bank.

Unconditional Coordination and Cooperation from Stakeholders

The Reserve Bank notes that the proper exercise of the enhanced empowerment would require coordination with and cooperation from several stakeholders including banks, ARCs, rating agencies, IBBI and PE firms, to which end the Reserve Bank would be holding meetings in the near future with these stakeholders.

Why taking prompt steps is important?

Both the original ordinance and the action plan focuses on the term “stressed assets”. It is very much settled that the problem of bad loans in the country is on its worst. If not now then there probably is no later in this scenario.

Making the law in form of an ordinance and taking prompt steps in its implementation are all evidence of how keen and active the Government has become in clearing the balance sheets of the banks and wiping off stressed assets in the nation.

What numbers say?

A latest report issued by McKinsey & Co. titled, “Mastering new realities – A blueprint to transform Indian banking”, May 2017[4], drills down the case and presents an appalling picture.

According to the numbers presented in the report (See Picture 1), the quantum of distressed loan in the country crossed INR 10 lakh Crores in December 2016.

It further highlights the problem for the public-sector banks (PSBs), where stressed assets have surpassed their net worth. Evidently, current provision levels in the bank are seem to be insufficient to beat the odds, with a gap of nearly INR 600,000 crores between the level of stressed assets and the provisions made. It is believed that as these stressed assets continue to turn bad, the entire equity base of the banks could be at risk.

Picture.1

Source: Mckinsey&Co. Report

Going by the statistics of the report and the comments made thereunder, it is being suggested that if the situation as discussed above, prevails over a period of time from now, the results shall absolutely be disastrous.

This raises fear and makes us realize that we surely have come a long way as far our economy is concerned, but issues as bad as stressed assets in the banking sector may eat up all the hard work along the way for no good reason.

It is indeed direly crucial for the Government to do whatever it takes to pull back the country out of bad loans’ pit fall.

[1] http://www.prsindia.org/uploads/media/Banking%20Ordinance%202017/The%20Banking%20Regulation%20Amendment%20Ordinance%202017.pdf

[2] https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR31388E3F78A130A9405F9891AC490EB2834B.PDF

[3] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/503ACF260214F.pdf

[4]http://www.mckinsey.com/~/media/McKinsey/Global%20Themes/Asia%20Pacific/Mastering%20new%20realities%20A%20blueprint%20to%20transform%20Indian%20banking/Mastering-new-realities-A-blueprint-to-transform-Indian-banking.ashx

The author can be contacted at: vallari@vinodkothari.com

FAQs on impact of GST on financial services, by Financial Services Division, 24th May, 2017

  1. What is the meaning of financial services?

Financial services have no meaning ascribed to it under the GST regime. However, for the purpose of this write up, by financial services, we mean any supply of goods or services by a person to another person, meant for the purpose of extending credit support. This includes, but is not limited to the following: Read more