The Direct Tax Code which has been introduced in Parliament as Bill has apparently treated the Cooperative Sector in a very casual and dismissive manner. It could be a fact that as the share of urban cooperative banking sector being less than 4% of the resources of the banking industry, it might not have been looked at as important enough a segment to warrant attention it otherwise deserves.
Although the urban banking sector account for only 4% of the banking sector resources, this sector caters to 60 million account holders and 15 million depositors. The membership of urban banks is over 20 million.
In addition to urban banks, there are over 40,000 cooperative credit societies in the Country(apart from PACs) catering perhaps over 20 million population, that ensure that their members do not go back to the money lenders for their financial needs.
Importantly, urban banks and cooperative credit societies are the only widespread formal grass roots local institutional set up.
Thus, these representative factors above give ample evidence of the fact that urban cooperative banks and credit societies have to be carefully nurtured as they form a readymade network of institutional set up already involved in financial inclusion, which can be introduced to technology for better results.
It would therefore be highly counterproductive to the economy of the Country to club these tiny socially relevant economic entities with commercial banks in the corporate sector and to impose tax dispensation that is at par with those of the larger commercial banks. Unfortunately the DTC is aiming to do exactly that.
The Code effectively ignores the very basis of cooperative philosophy and equates cooperatives with the corporate and private business in its treatment of their earnings. In fact, the amendment to section 80(P) of the Income Tax Act in 2006 itself, when Sec80(P)(4) was introduced, gave an indication that the Govt. was not much interested in recognizing and respecting the rationale behind the continued special treatment given to the cooperatives since 1922. Now, many of the provisions relating to cooperatives in the Tax Code Bill 2010 introduced in the Parliament, are so detrimental to the growth of cooperatives that it only confirms the fears of the sector about the short shift being given to cooperatives, undermining the importance of their role in the Economy.
Some of the striking instances of depriving the cooperatives of what little benefits they enjoyed till now and which have been neutralized in the DTC are as under:-
1. Cooperative Credit Societies and Taxation of their income
Provisions of Sec.80(P) of the existing Act are in clause 85 and 86 in the DTC, with incomes of cooperatives of many business activities that were included in the Sec80(P) till now, having been removed from the income tax deduction. This is nothing but administering body blow to most of the small cooperatives that have been existing and supporting economically weaker strata of society. Over 40,000 cooperative credit societies that are very vital institutions supporting the credit needs of unorganized sector, will be crippled by this provision of DTC. The provision needs to be relooked, if the Govt. wants to spare further agony to the people of extremely limited means.
2.Deductions for Bad & Doubtful Debts – Non-Scheduled Banks
The deduction for bad and doubtful debt provision has been delinked from the total income, as is at present,(7.5% of the total income is deductible for provision for scheduled banks, non scheduled banks and cooperative banks.) Under the clause 35(3)(c) of the DTC, the limit is linked to the aggregate average advances. This deduction is available to “financial institutions” and the financial institution is defined in the DTC(clause314(99) to include “scheduled bank”. Most of the urban cooperative banks (out of 1674 banks only 54 are scheduled) are non scheduled banks and therefore not covered in the definition of financial institution, which means that they will not get any benefit for deduction in respect of provision for bad and doubtful debts. Even the non scheduled state cooperative banks and large number of district central cooperative banks will also lose the benefit. This glaring omission needs to be set right and the definition of financial institution should include scheduled as well as non scheduled banks.
3. TDS on Deposits with Cooperative Banks/Credit Societies of members
a) Clauses relating to TDS in the DTC have been made highly detrimental to the cooperative credit institutions. Under the existing Act. TDs is not required to be made on interest paid by a cooperative society to its members and to any other cooperative society. These provisions have been removed in the DTC .Cooperative banks and cooperative credit societies will be very adversely affected by this. Thousands of credit societies with poor people as members could close down. Such a move is directly at variance with the Nation’s objective of total financial inclusion, as members of these formal institutional set up could well go back to the informal entities like money lenders, operating in the grey economy.
b) DTC has sections 195 to section 200 dealing directly with the TDS. These provisions, when made applicable to cooperatives, will result in the cooperatives losing the benefits that they presently enjoy, in respect of not deducting tax at source from members on interest paid to them. While there is provision for borrowers of banks, including cooperative banks, not being required to deduct tax at source from the interest being paid to the bank by them, no specific clear exemption of this nature is given to cooperative credit societies. It is quite unimaginable that small borrowers (a number that could be in the region of 40 million) of credit societies(that are around 40 thousand in number) will require to do TDS in all cases of payment of interest on their loans beyond a particular prescribed ceiling. Such provisions in the DTC apparently highlight the fact that the makers of the Code have completely ignored the existence of such a large number of entities in the institutional set up of the Country. It may be added that these are not informal entities but are regularly registered societies, that have been registered under the cooperative societies acts of their respective states.
4. Dividend Payments by Cooperative Banks
The DTC has no provision to exempt income derived from interest/dividends by members of a cooperative society or by one cooperative society from another society. This provision exists in the Income Tax Act 1961.
Historical Perspective
Like in most parts of the World, Income Tax Acts in India have generally enacted with exemptions on the income of Co-operative Societies. Right from the 1922 Act, and also prior to the grant of exemption under Section 14(3) of the Act, CBR Notification No. 35 dated 20-10-1934 and No. 33 dated 18-8-1945 were issued by the Central Board of Revenue under Section 60 of the 1922 Act.
By virtue of the Notifications, the profits of Co-operative Societies in general and the dividends or other payments received by the members from such co-operative societies out of such profits were exempted from tax.
One of the earliest cases conferring the benefit of exemption is reported as Bihar State Co-operative Bank Ltd., Vs. CIT (1960) 39 ITR 114 SC. Thereafter the exemption was available under the 1922 Act itself. When 1922 Act was replaced by the 1961 Act, Section 81 continued the exemption in respect of the Co-operative Societies including Co-operative Banks.
Thereafter, Section 81 was deleted when Chapter VI-A was introduced and Section 80-P continued the exemption which was earlier granted under Section 81.Section 80-P is one of the Sections in Chapter VI-A.
While the Direct Tax Code 2010 will replace the existing Income Tax Act 1961, when the Bill is passed by the Parliament, and the provisions of the new legislation will come into effect soon, we would nevertheless make our submissions for changes in the existing Act and would request that the appropriate changes be kindly made in the Direct Tax Code 2010 also, before it is enacted.
Taxation issues of Cooperative Banks under IT Act-1960
Deduction under section 80P of income-tax act, 1961
Deduction under section 80P of the Act is restricted to Primary Co-operative agricultural and rural development bank. It is not available to all co-operative banks.There is no rational reason for withdrawing the deduction u/s 80P which was hitherto available to all co-operative bank upto and including assessment year 2006-07. The co-operative banks are saddled with huge burden of taxation.
It is suggested that the pre 2007 position is brought back into the statute book for the following strong reasons:-
Urban Cooperative Banks (UCBs) are 1674 in number with Rs.1.83 lac crores as deposits, constituting 3.8% of the deposits of commercial banks. Similarly, 31 State Coop. Banks (SCBs) and 369 District Central Coop. Banks (DCCBs) with total of Rs.1.97 lac crore deposits, also constitute less than 4% of the deposits of commercial banks. Between the UCBs, SCBs & DCCBs, cooperative banks have total of Rs.3.80 lac crores of deposits which are less than 9% of the deposits of commercial banks.
Important aspects of cooperative banking sector are :
Avenues of raising capital for cooperative banks is limited to increase in shares from their members which cannot be tapped beyond a level. The only other way of augmentation of owned funds is retained earnings.
Concept of “one-member-one-vote”, absence of any co-relation of net worth of the cooperative bank and its share value, absence of any trading platform for transfer of shares at their market value, and above all, the non-perpetual nature of shares of co-operatives, negates the presumption that the “retained surplus” of cooperatives are to be termed as “profits” in spirit and be taxed. It is for this reason that the earnings of credit cooperatives are not taxed in two thirds of the countries of the world.
A strong reason attributed by World Council of Credit Union, for exemption of retained earnings of cooperative banks from tax is the fact that these amounts increase the lendable resources of the cooperative banks who extend credit to the needy sections of society, providing value addition to the economy.
This is all the more relevant in the Indian context. The amount that is collected as income tax from the cooperative banking sector every year, if left in the hands of cooperative banks, would augment their capital base to help them increase their deposits and provide loans to the tune of about 10 times the tax amount. These loanable funds would go primarily to marginal farmers, artisans, urban poor, petty traders, self employed and lower middle class sections of the society.
Tax from cooperative banks is not very significant and it could easily be foregone in the larger interests of the cooperative banking sector and the underprivileged sections of the society. This is particularly important when viewed from a very valid assumption that the customers that are not accommodated by the cooperative banks turn to private money lenders and very rarely they approach the commercial banks.
Out of less than 2500 cooperative banks that are liable to pay income tax, 1674 are urban cooperative banks. Most of these urban cooperative banks are very small. In fact, mere 2% of the urban banks account for 40% of the resources. It, therefore, does not stand to reason to tax 98% of such small socio-economic entities, particularly when they have very few avenues of raising capital.
It is submitted that the issue of imposition of income tax on cooperative banks be kindly revisited and the applicability of Sec.80(P)(2)(i) of the Income Tax Act be restored for cooperative banks by deletion of Sec.80(P)(4) that was introduced through Finance Act 2006.
Further, there are certain deductions which are available to commercial banks and cooperative banks have been denied those on account of the construction of the relevant sections.
Deduction under section 36(1)(viia):
Section 36(1)(viia)(a) as it stands in the statute today reads as under: iia) in respect of any provision for bad and doubtful debts made by –
(a) a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner:
Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:
Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words “five per cent”, the words “ten per cent” had been substituted :
The income-tax authorities are of the view that the main sub-clause (a) of section 36(1)(viia) makes specific reference to co-operative bank and the proviso does not contain any reference to a co-operative bank. Hence, the option to claim deduction towards provision for bad and doubtful debts equivalent to 5 % of the amounts classified as doubtful assets or loss assets in accordance with the guidelines issued by Reserve Bank of India is not available to a co-operative bank. The income-tax authorities in some states interpret that a co-operative bank is neither a scheduled bank nor a non-scheduled bank. It is submitted that this is a totally perverse interpretation of law. A co-operative bank has to necessarily be a scheduled bank or non-scheduled bank. If it is neither a scheduled bank nor a non-scheduled bank, it cannot carry on any banking business at all.
To avoid litigation, it is preferable that a specific reference to co-operative bank is made in the proviso to section 36(1)(viia)(a). Similarly the definition of rural branch given in Clause (ia) of Explanation below section 36(1)(viia) be also amended to specifically include co-operative bank.
Non applicability of Sec. 43D to non-scheduled banks
Current section 43D which allows taxability of interest on NPA only when such interest is credited to Profit and Loss Account or if such interest is actually received is applicable only to a scheduled bank. All co-operative banks are not scheduled banks. Therefore, following suggestions to be incorporated in the Section 43D.
To amend section 43D to state that interest on NPA is to be offered to tax by all co-operative banks scheduled or non-scheduled only on receipt basis irrespective of the method of accounting followed by the co-operative banks.
Exemption from provisions of Sec.194A.
Section 194A(3)(i)(b) of the Act reads as under:
(3) The provisions of sub-section (1) shall not apply–
(i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed —
Ten thousand rupees, where the payer is a co-operative society engaged in carrying on the business of banking ;
(c) …………………………………
Section 194A(3)(v) of the Act reads as under:
(3) The provisions of sub-section (1) shall not apply–
(v) to such income credited or paid by a co-operative society to a member thereof or to any other co-operative society ;
An analysis of the above provisions show that:
1.Tax is not deductible at source on interest paid or payable by a co-operative society to its members or any other co-operative society irrespective of the amount of interest paid or payable
2. In case of interest paid or payable by a co-operative bank to a no-member, tax is deductible at source if the interest is paid or payable exceeds Rs. 10000. Sec 194A(3)(i)(b) applies only to interest paid by a co-operative bank to non-members.
The income-tax authorities are of the opinion that section 194A(3)(v) is a general clause and sec 194A(3)(i) is a specific clause and hence, a co-operative Bank has to necessarily deduct tax at source on payments made to a member in excess of Rs.10000. This interpretation is perverse. For example, Sec 2(b-1) of the Karnataka Co-operative Societies Act, 1959 states :
“Co-operative Bank” means a Co-operative Society which is doing a business of banking.
As per the above definition, a ‘co-operative bank’ is a ‘co-operative society’. Hence, a co-operative bank need not deduct tax at source in case of interest paid to its members irrespective of the amount. Section 194A(3)(v) applies to even a co-operative bank, and it should not be interpreted otherwise.
To avoid litigation, it is preferable if section 194A(3) is amended to clearly state that a co-operative bank is not liable to deduct tax at source on any amount of interest paid to its members.
5. Sec.80(c)(xxi) of the Income Tax Act 1961 – Inclusion of deposits with non-scheduled cooperative banks for eligibility
The clause (xxi) was introduced to Sec.80(c) of the Act in 2006 to include term deposit for a fixed period of not less than 5 years with a scheduled bank to be included as investments eligible for deduction for the purposes of Sec.80(c). Of the 1800 urban cooperative banks, only 53 are scheduled banks. The non-scheduled urban cooperative banks are disadvantaged on account of the discrimination against them. Deposits are being shifted from non-scheduled cooperative banks to scheduled commercial banks, since very few centers in the Country have scheduled cooperative banks.
It is submitted that the clause (xxi) be amended to
i) include “and a cooperative bank” after “scheduled bank”;
ii) replace “for a fixed period of not less than 5 years” by “for a fixed period of not less than 3 years”;
iii) add in the explanation “and a cooperative bank means a State Cooperative Bank, a Central Cooperative Bank and a Primary Cooperative Bank, as defined in Sec.5 (as modified by Sec.56(AACS) (cci) of the Banking Regulation Act 1949”.
Extension of jurisdiction of Debt Recovery Tribunals to hear the cases of recoveries of cooperative banks debts
At present the Debt Recovering Tribunals do not accept the recovery cases of cooperative banks as the Debts Due to Banks and Financial Institutions Act 1993 is not applicable to the cooperative banks. The number of loan accounts of over Rs.10 lacs have increased manifold even in the cooperative banks, over a period of 10 years.
It is submitted that the cooperative banks may also be kindly brought under the purview of the Debts Due to Banks and Financial Institutions Act 1993, so that they become eligible to approach DRTs for recovery of their dues.
We request the Hon’ble Finance Minister to kindly include the amendment to the Act to make cooperative banks eligible to take advantage of DRT.
Rates of taxation to cooperatives
The fact that the cooperatives have a separate set of tax rates prescribed is a small recognition of the fact that they have to be treated separately. However, even when the rates were prescribed they were devoid of any practical usage and were, at best ,meant to be paying lip service to the fact that cooperatives were different from corporate. Over a period time these figures have completely lost their meaning and the section needs to be looked at de-novo.
The current rate of income-tax as prescribed, in case of a co-operative society, is as under: –
( 1) Where the total income does not 10 per cent of total
exceed Rs.10,000 income
(2) Where the total income exceeds Rs.1,000 plus 20 per
Rs.10,000 but does not exceed Rs.20,000 of the amount by Which the total income exceeds
Rs.10,000
(3) Where the total income exceeds Rs.20,000 Rs.3,000 plus 30 per cent of the amount the total income exceeds Rs.20,000
The above slab limits are much too low and were fixed very long back. The amounts mentioned are so trivial and small in the present context that they have no relevance whatsoever. The issue of providing graded income tax slabs so that small cooperative societies which are nothing but aggregate of people of very small means most of whom are below the threshold limits in terms of income tax, get meaningful relief, needs to be examined thoroughly and a new slab structure for cooperatives is to be put in place.
Just as the position of primary agricultural societies, and primary rural development banks have been recognized to be given full income tax exemption, thousands of small cooperatives in diverse sectors providing services to their members deserve at least some benefits through well structured tax rate slabs. For example, if small societies of, say, 2000 members or so posts a profit of Rs5,00,000,for the year, it does not really amount to much.
It is therefore, preferable that the slabs and limits are increased so that small co-operative banks are not burdened with income-tax and at the same time the larger cooperatives are also not taxed in a manner that corporate in the commercial sector are taxed. Considering that the request for removal of cooperative banks from applicability of Sec80P(4), based on very credible arguments, may be not considered,it is strongly recommended that the acknowledgment of cooperative banks being different from the commercial banks be recognized by way of putting in place distinctly different rate structure for the cooperative sector.
SUGGESTED SLABS:
1. Where the total income does not
exceed Rs.1,00,000 NIL
2. Where the total income exceeds 10% of total income Rs.1,00,000 but does not exceed
Rs10,00,000
3. Where the total income exceeds Rs90,000+20% of the
Rs.10,00,000 but does not exceed amount by which the
Rs.1,00,00,000 total income exceeds Rs.10,00,000
SUBMISSION
We request the Hon’ble Union Finance Minister to consider the above suggestions in the ensuring Union Budget and amend the relevant provisions of Income-tax Act to rationalize the taxation provisions relating to co-operative banks. Such a rationalization of cooperative income will recognize the differentiation between the profits of commercial business entities and the surplus of essentially mutual help entities like cooperative societies, while at the same time giving some benefits to small cooperatives and taxing the larger ones.
We also submit that the changes may kindly be incorporated in the Direct Tax Code 2010, with amendments in the appropriate sections/clauses of the DTC