BFSI Sector on the Brink: Anticipating Game-Changing Tax Reforms

As we approach the 2025 Union Budget, the Banking, Financial Services, and Insurance (BFSI) sector is keenly anticipating potential direct tax reforms that could bolster business operations, enhance profitability, and encourage investment. From digital banking to sustainable finance, and from financial inclusion to regulatory innovation, the scope for reforms can be vast and could redefine India's position on the global stage.

Here are few expectations on Direct Tax Reforms from the BFSI Sector

Concessional Tax Regime for New BFSI Entities and Global Players

Currently, a 15 percent tax rate is available for new manufacturing companies, but no specific concession exists for newly incorporated BFSI entities. A special concessional tax rate should be introduced for these entities, particularly those focusing on fintech solutions such as digital payments, blockchain, AI-driven banking services, and digital lending platforms aimed at financial inclusion.
Simplification of Tax Laws and Rationalisation of Tax Deducted at Source (TDS)

Simplifying tax laws and easing the burden on taxpayers is a primary expectation. This includes rationalising TDS obligations. While steps have been taken since the last Budget, further consolidation of TDS categories and reduction in their number will ease compliance. Simplifying these provisions will streamline the tax filing process and reduce complexities in audits.
Tax Relief for Green and Sustainable Finance

Currently, there are no targeted tax incentives for green or ESG-focused financing. The government should introduce a weighted average deduction for BFSI entities financing green bonds, renewable energy, and ESG-compliant projects. Additionally, a complete tax exemption on interest income from green bonds issued by entities operating in International Financial Services Center (IFSC) and exemptions on long-term capital gains for investments in ESG and green infrastructure funds should be considered.
Notification of Non banking financial companies (NBFC) Classes for Exemption from Section 94B of the Income-tax Act, 1961

While NBFCs have been excluded from the applicability of section 94B of the Act, relating to thin capitalisation rules for interest payments made to related parties, the government has yet to notify the specific classes of NBFCs to which this exclusion applies. It is crucial for the government to provide this notification to give clarity to NBFCs.
Rationalisation of Surcharge for Non-Corporate Foreign Portfolio Investors (FPIs) on Interest Income

The Finance (No. 2) Act, 2019, enhanced surcharge rates for non-corporate taxpayers. Although the surcharge on capital gains and dividend income for FPIs has been capped, interest income remains subject to higher rates. The highest effective tax rate on interest income for non-corporate FPIs can be 28.50 percent compared to 21.84 percent for corporate FPIs. To simplify tax laws, the government should cap the surcharge rate for FPIs across all income streams to 15 percent.
Strengthening Tax Incentives for International Financial Service Centers (IFSC)

The IFSC is a significant initiative by the Indian government to attract foreign investors. The government should consider extending the tax exemption from 10 years to 15 years or providing flexibility to choose 15 out of 20 years, considering long-term project timelines or longer gestation periods in financial services. Additionally, new-age financial services such as sustainable finance, climate-related financial instruments, fintech innovation (blockchain, AI, and regulatory technology), and ESG investments should be included in the eligible income category.

In summary, the upcoming Union Budget presents a pivotal opportunity for the government to introduce meaningful tax reforms that can significantly impact the BFSI sector. By addressing these key areas, the government can create a more conducive environment for growth, innovation, and sustainability within the sector. These reforms will not only enhance the sector's global competitiveness but also contribute to the broader economic development of the country. As stakeholders eagerly await the Budget announcements, there is a collective hope that the proposed changes will pave the way for a more robust and dynamic financial ecosystem in India.

A version of this article was published by Firstpost.com. The same can be read here