Mumbai: Banks want to reduce the tenure of long-term deposits from five years to three to bring such deposits on a par with equity-linked savings scheme, or ELSS, of mutual funds.
ELSS operate like an equity fund and investors get a tax benefit as up to Rs1 lakh investment in such schemes is deducted from their taxable income.
Three years ago, the Union budget extended a similar benefit to long-term bank depositors too. However, since long-term deposits are locked in for five years while ELSS has a lock-in period of three years, banks have not been able to woo investors to their fold.
This is why bankers are demanding that depositors should be allowed to withdraw their money after three years.
They also want the freedom to offer loans to depositors against such long-term deposits.
Yet another demand of the banking industry is doubling the tax concession on such deposits—from Rs1 lakh to Rs2 lakh.
This, argues the Indian Banks’ Association (IBA), the premier bankers’ lobby, will encourage people to keep money with banks, helping them in turn to raise resources that can be lent to companies.
Traditionally, banks fight for resources with ELSS from mutual funds that attract money by offering tax-free dividend income to investors. Bank deposits, however, are subject to tax deducted at source, or TDS. Banks deduct 10% TDS on interest income once it crosses a certain level and a depositor is required to pay income tax depending on her overall income.
As a part of its 20-point pre-budget memorandum, IBA has also pitched for making interest income of overseas lenders on external commercial borrowings, or ECBs, tax-free.
It has argued that Indian banks end up carrying the tax burden as the foreign lenders refuse to part with their interest income in the form of tax.
According to senior bankers, to take care of the tax, foreign lenders inflate the rate of interest while giving a loan to an Indian bank, which borrows on behalf of its corporate clients. This practice of including tax while lending is called “grossing up”.
Such borrowing from a foreign entity for industrial purposes was tax-free earlier, but it was withdrawn in 2001.
IBA is also demanding that the interbank transactions of purchase and sale of foreign currency be tax-free. Currently such transactions attract 0.25% tax.
Even though the banking community is not in favour of withdrawal of the 12.36% services tax levied on retail transactions on purchase and sale of foreign currencies, it does not want to pay the 0.25% tax on foreign currency transactions among banks.
This is because the profit on such transactions is very low and sometimes even lower than the tax rate charged on such transactions.
According to IBA, if a transaction does not involve the rupee as one of the currencies, it necessarily has to be dealt with an off-shore counter party.
“In such cases, since both currencies involved are foreign currencies, this may attract multiple instances of tax on the same transaction. In addition, since one of the counterparties is based offshore and not subject to the same tax laws, invoicing for such charges and collecting payments will be administratively difficult and the tax liability will fall back on local banks,” IBA said in its memorandum submitted to the finance ministry.
Bankers also want the government to reinstate the rule allowing banks to claim full deduction on the interest earned on long-term lending to the infrastructure sector. The facility was withdrawn in 2007 and now a tax sop of only 20% of the profits earned from the infrastructure sector is allowed if the bank is creating a special reserve out of that profit.
According to IBA, reintroducing full deduction would increase the credit exposure of banks to the infrastructure sector, a key area of economic development.
Among other demands, the bankers’ body wants the age of a senior citizen be revised downwards to 60. Even though Indian Railways and banks treat a person as a senior citizen when she or he attains 60 years and offer various concessions such as lower railway fare and higher interest rate on deposits, under income-tax norms, one becomes a senior citizen after 65 years of age.
If this is done, banks will not be required to deduct tax at source from senior citizens aged between 60 and 65 as they are entitled to various tax concessions. Once tax is deducted at source, one needs to claim a refund after filing returns if the person is not earning enough that attracts income tax.
The association has also demanded an amendment in the rules related to tax deducted at source since banks face “huge problems in collecting TDS certificates and face huge disallowance at the time of assessment for no fault of theirs”. IBA argues that banks pay adequate advance tax and hence should be exempted from TDS.