The poor and vulnerable continue to face a dearth in banking and financial services in India. Over the past decade, microfinance has emerged as an influential and high potential industry in its own way. In spite of the support extended by the Microfinance institutions (MFIs), the past budgets were not very encouraging. Microfinance has been overshadowed by the heavyweight industries such as IT, autos, telecom, infrastructure and banking.
C Rangarajan's committee on financial inclusion reported that MFIs "could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor." The Government's financial inclusion of MFIs as one way to reduce poverty has helped in providing financial services from small loans to insurance to millions of unbanked households. However, several fiscal constraints have kept the microfinance sector from reaching its full potential, while banks are privy to certain tax benefits by way of tax deductions and exemptions, MFIs do not.
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The poor need microfinance to undertake economic activity, smoothen consumption, mitigate vulnerability to income shocks (in times of illness and natural disasters), increase savings, and support self-empowerment. Government should consider the tax breaks to MFIs which in turn helps the rural economy.
The Budget 2010 is expected to incorporate the recommendations of the 13th Finance Commission. It would also pave way for the implementation of Direct Tax Code (DTC). The proposed DTC has introduced a tax benefit to the extent of one percent of the aggregate average advances for all the financial institutions including the MFIs in connection with the provision for bad and doubtful debts, which is in accordance with the prudential norms of Reserve Bank of India should be considered by the Finance Minister in the present Budget.
The benefit of exemption of non deduction of tax in connection with the interest payments made to banking companies, co-operative societies engaged in banking business, public financial institutions and other notified institutions should also be extended to MFIs as they are engaged in the similar line of activities. Further, the exemption limit for the tax deduction at source on interest paid by the MFIs accepting deposits should also be on par with the banks and other notified institutions.
With consolidation MFIs are able to cater to many more areas of finance and provide better services to its customers and are able to compete with banks and financial institutions, the benefit of carry forward of losses and unabsorbed depreciation to the amalgamated banking company should also be extended to MFIs.
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MFIs look forward for the tax breaks which are enjoyed by the banks as it could lower their costs and pass those savings onto borrowers by reducing interest rates. Thereby, MFIs would be more affordable for the poor and could flourish further across India
The author is a senior tax professional, Ernst & Young. The views expressed are personal.
