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TDS on Interest

Pavan (CA) (76 Points)

29 April 2011

Is TDS required to be made on interest paid/payable to NBFC.

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(Guest)

yes

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Harpreet (* * * * * *) (1670 Points)
Replied 29 April 2011

Yes, liable to deduct TDS

Non-banking finance companies (NBFCs) want exemption from tax deduction at source under Section 194A of the Income Tax Act.

Currently, tax is deducted on the interest paid by the borrower to asset financing companies (AFS) and NBFCs. But banks, co-operative societies engaged in banking business, public financial institutions, LIC, UTI and insurance companies are exempt from paying this tax.

The TDS severely affects the margins and cash flow of AFS and NBFCs, said Mr Sanjay Chamria, Vice-Chairman and Managing Director, Magma Fincorp Ltd.

The TDS effectively increases the interest charged by NBFCs by one per cent making them non-competitive. Therefore, NBFCs should also be exempted from TDS on interest payment, said Mr Hemant Kanoria, Chairman and Managing Director, Srei Infrastructure Finance Ltd.

“In order to prevent any misuse of the exemption, the Government can stipulate that only systemically important infrastructure financing NBFCs (registered with the RBI and following all the prudential norms prescribed by the RBI) will be entitled to the exemption, Mr Kanoria added.

Hire purchase

Some of the other demands include removal of multiple taxation on hire purchase and leasing transactions. Currently, hire purchase and leasing transactions are subjected to value-added service tax, service tax as well as TDS.

Construction equipment which are registered under the Motor Vehicles Act and used in the business of running them on hire should be allowed a higher rate of depreciation as they are mainly used in the development of infrastructure facilities.

NBFCs and AFCs should get access to refinance, just as banks and housing finance companies.

They should be allowed recourse to the SARFAESI Act as it will help them strengthen their recovery mechanism.

Fund raising

With regard to fund raising, developing the corporate debt market will make it easier for NBFCs to raise money from sources than other banks, financial institutions and insurance companies.

In fact, the RBI in its October 2009 Monetary Policy had talked about the introduction of Priority Sector Lending Certificate (PSLCs). These could be issued by NBFCs for the amount of loans granted by them to the priority sector. These PSLCs could then be traded in open market and banks can meet their priority sector lending requirements by buying these certificates.

“Introduction of this will help NBFCs raise money at competitive rates by selling certificates while loans can remain in their books,'' Mr Chamria said.

The sector hopes that this year's Budget will provide them with a more level-playing field with banks and other financial institutions.

(This article was published in the Business Line print edition dated February 13, 2010)