Budget 2022: What financial services sector expects from FM Sitharaman

The Indian economy is recovering strongly amidst uncertain times and a volatile environment caused by various disruptions, high inflation and geopolitical tensions. 

However, the third wave of COVID-19 appears to be a new dampener, holding up employees' plans to return to work amidst concerns of health safety.  

Despite reports that the third wave is mild and may not impact the growth agenda, the future is still uncertain. However, the Indian capital markets have been buoyant having regained momentum, gearing up to touch new highs in 2022. 

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The financial services industry is set to operate in a very dynamic and fast-changing world. The disruptions caused by the pandemic in 2021 across all industries (including financial services) has prompted all players to re-think strategies, invent, and innovate, to ensure long term sustainability and to continue to be relevant amidst changing modes of how the world does business today. 

The buzzwords for the financial services industry, be it banking and capital markets, insurance, investment management, real estate, etc., would continue to be "Digital Transformation" and "Innovation".

In fact, its acceleration/deceleration could be the difference between "disrupt" and "be disrupted" for industry leaders and incumbents. 

The increasing reliance on technology, in turn, leads to its own set of challenges, such as - (i) shortage of talent with both technology and financial services capabilities, (ii) cyber risks on data confidentiality, storage, etc., and (iii) financial frauds, all of which will need adequate considerations. 
 
Industry lines between financial services and technology services are blurring, which is evident with the growing market of FinTechs, InvesTechs, InsureTechs, etc and the war for talent between various financial services companies and technology companies is increasing by the day. 

This could get even more dynamic with the emergence of digital assets and exploration of various kinds of opportunities across a range of different digital platforms - from Stablecoins to central bank digital currencies [CBDCS], to non-fungible tokens [NFTs], etc., which is likely to define the future of money and investing. 

Also Read: Budget 2022: Fiscal consolidation shouldn't be only focus, say SBI economists
 
Asks and expectations 
 
Regulatory and tax relaxations (by way of weighted tax deductions) would help boost spending on digitalisation and innovation. 

Additionally, relaxation on the digital tax (i.e., equalisation levy) as well as withholding tax to ensure that unwarranted financial services transactions/products are not caught within its ambit, would help reduce costs and compliances. 
 
Currently, the income tax law requires buyers that have not withheld tax at source [TDS] on "purchase of goods", to be subjected to a tax to be collected at source [TCS], by the seller of the goods @ 0.1% on the sale consideration, subject to conditions. 

There is ambiguity on the applicability of this tax provision to transactions involving the sale of Indian securities that do not take place on the floor of a recognised stock exchange [RSE] in India.

This has been impacting the way private equity transactions are done in India and creating situations for unnecessary tax withholdings and tax refund claims. 

Securities have different connotations from goods, and different tax treatment is provided for securities vis-à-vis goods. 

While clarification is issued for excluding transactions in securities done on an RSE in India, there is still uncertainty as to whether TCS applies to other situations. 

Hence, the government needs to issue suitable clarification confirming that all securities are not to be regarded as "goods", for the purposes of TCS provisions. 
 
With an option available to Indian companies to opt for a lower rate of tax, the differences between the corporate tax rate for foreign branches/reinsurance companies operating in India and Indian banks/insurances companies has grown wider (as much as 18%).        

Hence, to provide a level playing field to both constituents, the corporate tax rate applicable to foreign banks/reinsurance companies (currently 40%) may be reduced to 30%, or brought on par with the lower optional tax rate of 22%, currently available to Indian banks/ re-insurance companies. 
 
To make IFSC - GIFT City a more attractive proposition, investors would expect further relaxations such as - increasing the longevity of the income-tax deduction benefit, eliminating the need for withholding tax, transfer pricing, and applicability of GAAR to any transactions involving IFSC units, incentivising companies/individuals through fiscal incentives for enabling smooth movement of skilled personnel to GIFT City. 
 
Policy Interventions 
 
The financial services industry is at a pivotal point in its evolution with a huge opportunity to really embrace and lead the way to a more sustainable future. 

Thus, strong policy and governance measures can help reallocate capital toward economic activities that are net positive to societies.

They can also nudge new behaviours among clients and counterparties as well as pave the way for financial inclusion. The government could thus introduce policy measures to address the governance, management, and operational issues faced by various financial services companies to ensure transparency and professionalism. 
 
Cryptocurrencies and other digital assets are gaining momentum in India from a business and regulatory perspective. 

This makes the introduction of a special tax and regulatory policy for various digital assets to cover various aspects (such as their classifications, compliances, legality, valuations, etc.), as the need of the hour. 
 
(Russell Gaitonde is a Partner with Deloitte India, and Tejas Mehta is a Director with Deloitte India.  Views expressed are personal.)