Budget 2022: Proposals for banking sector

India's GDP is expected to expand 9.2% in FY 2021-22, after a contraction of 7.3% in FY 2020-21. Growth in private sector investment is expected in the coming year with support from the financial system.

India's GDP is projected to grow in real terms by 8.0-8.5% in FY 2022-23. The banking industry scenario this year as per the Economic Survey for FY 2021-22 

The banking sector has performed well as the capital adequacy ratios have improved and non-performing assets have reduced. Capital to risk-weighted asset ratio (CRAR) of SCBs increased from 15.84% at end-September 2020 to 16.54% at end-September 2021, on account of improvement of CRAR of both public and private sector banks.

The Gross Non-Performing Advances (GNPA) ratio of Scheduled Commercial Banks (SCBs) decreased from 7.5% at the end-September 2020, to 6.9% at end-September 2021, whereas restructured standard advances (RSA) ratio increased from 0.4% to 1.5% during the same period. 

Also Read: The Booster Budget for 2022-23

Major Regulatory and Policy Initiatives 

The major regulatory measures in the banking sector inter alia include setting up a National Asset Reconstruction Company Limited (NARCL) and India Debt Resolution Company Limited (IDRCL) by RBI,  passing of the Deposit Insurance and Credit Guarantee Corporation (Amendment) Act. 

About 1.5 lakh post offices are proposed to come on to the core banking system enabling financial inclusion. It is proposed to set up 75 Digital Banking Units (DBUs) in 75 districts of the country by SCBs. 

Central Bank Digital Currency (CBDC) is being explored by central banks across the world. China has tested proof of concept for e-Yuan while the US Federal Reserve has solicited public comments on its proposed foray into digital dollar - the sovereign digital currency.

The committee set up by the government to examine the policy and legal framework for the regulation of virtual/cryptocurrencies recommended the introduction of CBDCs in India.

This is now being implemented. As announced by the Finance Minister, the Digital rupee will be introduced by RBI starting 2022-23, using blockchain and other technologies. With this India will join the select few major global economies to have its own sovereign digital currency.

The Budget has also continued support for the digital payment ecosystem and the focus will be to promote the use of economical and user-friendly payment platforms.

Also Read: Budget 2022: 75 digital banking units to be set up across 75 districts

Major tax reforms proposed in the Finance Bill 2022

Many taxpayers including banks have been making claims for allowance of deduction of "education cess" on the ground that cess is not in the nature of tax.

This is based on court decisions such as that of the Bombay High Court in Sesa Goa Limited Vs. JCIT (2020) 117 taxmann.com 96 and others, as well as interpretation of the Central Board of Direct Taxes (CBDT) Circular dated 18 May 1967.  

The Finance Bill has proposed to clarify retrospectively from the assessment year 2005-06 onwards that the term "tax" includes any surcharge or cess and thus education cess shall not be a tax-deductible expenditure. 

The CBDT Circular No. 5/2014 dated 11 February 2014 clarified that Rule 8D read with section 14A provides for disallowance of the expenditure even where the taxpayer in a particular year has not earned any exempt income.

However, few judicial decisions such as that of the Delhi High Court in Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 have held that no disallowance under section 14A was called for if no exempt income was received / receivable during the year.

The Finance Bill has now proposed that effective April 1, 2022 disallowance under section 14A will apply even in cases where no exempt income has arisen or received during the year thus overturning the judicial cases. 

Several tax concessions have been provided in relation with banking units in the International Financial Services Centre (IFSC) such as the extension of exemption to income arising to non-residents on the transfer of offshore derivative instruments or over-the-counter derivatives entered into with an Offshore Banking Unit (OBU) of an IFSC.

Similarly, it is proposed to provide an exemption to income received by a non-resident from the portfolio of securities or financial products or funds, managed or administered by any portfolio manager on behalf of such non-resident, in an account maintained with an OBU in an IFSC, to the extent such income accrues or arises outside India and is not deemed to accrue or arise in India. The aforesaid amendments shall be applicable from the assessment year 2023-24 onwards.

Virtual Digital Assets (VDA)

Section 115BBH proposed to be inserted with effect from the assessment year 2023-24 to provide the following:

• Taxation of income from transfer of any VDA @ 30% 
• Deduction to be allowed only for cost of acquisition 
• No set off or carry forward of any loss arising from transfer of VDA to be allowed. 

The term "VDA" proposed to be broadly defined to inter alia mean any information or code or number of tokens (not being Indian or foreign currency) generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, and includes its use in any financial transaction or investment and can be transferred, stored or traded electronically. 

Receipt of VDA without consideration or for a consideration less than fair market value proposed will be taxed under section 56(2)(x). TDS provisions introduced effective July 1, 2022, requiring deduction at 1% on consideration for transfer of VDA to a resident. 

Various practical aspects relating to the taxation of VDA need consideration e.g. clarity on coverage of definition, point of deduction of tax, determination of amount for TDS purpose, mechanism of TDS etc.

The Budget 2022 seeks to lay the foundation and give a blueprint to steer the economy over the coming years with an impetus for growth. The banking sector is an important component of the economy's growth engine which will play an important role in meeting budgetary objectives. 

(Smita Parulkar is Partner with Deloitte Haskins & Sells LLP; and Vidya Mallya is Senior Manager with Deloitte Haskins & Sells LLP.)