Non banking finance companies (NBFCs) and asset financing companies (AFC) have sought parity on tax exemptions granted to banks and financial institutions. Unlike banks, loans from NBFCs are subjected to a different tax regime.
Interest on loans granted by NBFCs are taxed at 10%, the banks and FIs enjoy tax exemptions. "NBFCs have a critical role to play in financial inclusion, we need to have a level-playing field with the banks and FIs and one of the areas that needs to be looked into is the tax regime," said Raman Aggarwal, co-chairman, FIDC.
According to Section 194A of the Income Tax Act, all borrowers of NBFCs are liable to pay a 10% tax deducted at source (TDS) on the interest portion of the installment paid under loan or finance agreements while banks, Life Insurance Corporation (LIC), UTI among others are exempted from the purview of this clause.
Several NBFCs, with their loan portfolio broadly concentrated around small and medium enterprises, are also waiting in the wings to set up full-fledged banks. But the Reserve Bank of India earlier had raised concerns over allowing NBFCs to convert into banks.