The banking sector is expecting a reduction in tax rates as well as liberalisation in the FDI policy, as the country prepares for the announcement of the Union budget proposals for 2017-18, which will be announced tomorrow by Union Finance Minister Arun Jaitley.
With the challenge to revive growth, Jaitley is likely to announce a higher outlay for capitalization of public sector banks, financial service reforms, tax breaks, deduction for NPA provisioning, etc.
Earlier, in a customary pre-budget meeting, Jaitley had nudged banks to think 'out-of-box' while doing business and dealing with challenges.
On the other hand, some PSU banks on their part suggested the need for recapitalisation of banks in the current financial year as well as in the next financial year 2017-18.
Adding to this, the banks emphasised on the improved liquidity post-demonetisation, which impacted the saving deposit rates. So, to curb the same, some sort of exemption is demanded by the banks under the Income Tax Act, so that a decent income through their deposits is generated.
However, as the bankers eye full tax exemption for NPA provisioning, there are market analysts who demand a Central Registry for GST registration for banks across the country.
Below are the top 10 concerns that market participants hope FM Arun Jaitley will address in Budget 2017:
Tax concessions:
-Hopes are high for tax concessions on the bad loan provisioning as RBI's asset quality review had a steep rise in provisions. Banks get only limited tax relief (up to 7.5 percent of total income) on the same.
According to RBI's Financial Stability Report, the combined bad loans in scheduled commercial surged to 12.3 percent of total assets in September 2016, from 11.5 percent in March 2016.
Roadmap for disinvestment in PSU banks:
- Although the government has set up 'Bank Board Bureau' to help banks raise capital, nothing concrete has been announced so far. An effective divestment to raise significant funds is required for amending of Banking Companies Act that may pave way for diluting stake in PSU banks to below 51 percent.
Higher allocation to infrastructure, housing and urban development:
- The asset quality of the banking sector has deteriorated sharply due to compounding problems in the commodity sector. With commodity prices recovering, government's push to infrastructure may do the trick to boost profitability of banks.
Higher capital infusion:
-Under the Indradhanush plan, the government has allocated Rs. 70,000 crore. Analysts expect an upward revision to the capital infusion in Budget 2017, as there exists a shortfall of Rs. 1.1 lakh crore factoring in the Indradhanush plan.
Credit off-take:
-After November 8, there was a surge in the deposits at the banks, which would only be a liability as long as the credit growth does not pick up.
-Data showed that credit demand slowed to a multi-decade low of 5.1 percent for the fortnight ended December 23, despite 175 bps reduction in repo rate since January 2015.
Affordable Housing:
-To offer additional tax benefit for principal repayment on home loans, which will increase the deduction of interest paid on home loans from Rs. two lakh.
-To include low-cost or affordable housing in the definition of infrastructure
-To increase allocation for the Pradhan Mantri Gramin Awas Yojana (rural housing)
Lower Corporate Tax Rate:
-Lower corporate tax for the financial sector-including all banks and non-banking financial companies (NBFCs) as they pay tax at 34 percent.
-Higher expectations of a service tax exemption on transactions through banking correspondents.
Digital Push:
-With more focus on cashless payments, it would be beneficial to see banks gaining the most out of the situation, which will give a push to the to the increased digitisation.
-A Cash Transaction Tax is a possibility as another measure to curb cash. It would be good for the system as financial savings will rise and retail-focused banks could be bigger beneficiaries.
Promoting financial savings:
-It is important to address disparity in post-tax returns of existing schemes like EPF, PPF, NPS, by moving towards a uniform tax.
-Reintroducing the inflation-indexed bonds which will benefit financial savings, and significantly lower reinvestment risks for pension, provident and gratuity funds.
Licensing framework:
-For vital, high growth of any sector, it is likely to safeguard all stakeholders and ensure cost and time-efficient transactions.
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