UNION BUDGET FOR 2006-07 AND ITS IMPLICATIONS
Shri P. Chidambaram, Hon’ble Union Finance Minister presented the budget for the year 2006-07 on 28.02.2006. The highlights of the budget proposals on (1) Agriculture, (2) Credit (3) Financial Sector, (4) Direct Taxes and (5) Indirect Taxes are presented and thereafter analyzed their implications on Cooperative Credit and Banking Institutions:
(1) Agriculture:
1.1 Irrigation: Out of an outlay of Rs.4,500 crore under Accelerated Irrigation Benefit Programme (AIBP) in 2005-06, the grant component is Rs.1,680 crore. The States are expected to spend about Rs.2,520 crore from their resources, and 25 projects are expected to be completed before the end of the year. The outlay for 2006-07 has been increased to Rs.7,121 crore, and the Central Government will support the programme through a grant of Rs.2,350 crore. The Ministry of Water Resources will revamp the Command Area Development Programme to allow participatory irrigation management through water users’ associations.
1.2 The programme for repair, renovation and restoration of water bodies is being implemented through pilot projects in 23 districts in 13 States. The design of the programme has been finalized in consultation with the States. 20,000 water bodies with a command area of 1.47 million hectares have been identified in the first phase. The estimated cost is Rs.4,481 crore. The funding pattern (Centre, States and external assistance) has been finalized, and funds will also be sought and received from multi-lateral agencies. The participating State Government will be requested to sign a memorandum of understanding and the water bodies in that State will be taken up for repair, renovation and restoration in 2006-07.
1.3 Agricultural Insurance: The National Agricultural Insurance Scheme (NAIS) will be continued in its present form for Kharif and Rabi 2006-07.
1.4 Plantation Sector: In continuation of the announcement in the last Budget to introduce a 15 year programme for massive re-plantation and rejuvenation of tea, Ministry of Commerce has proposed to set up a Special Purpose Tea Fund. It is proposed to make a levelized contribution every year to the Fund. For 2006-07, the contribution is expected to be Rs.100 crore. When established, the Fund will benefit growers in the tea growing States including Assam, West Bengal, Tamil Nadu, Kerala and Uttaranchal.
1.5 Horticulture and Fisheries: The PPP model will be employed to set up model terminal markets in different parts of the country. A sum of Rs.150 crore has been earmarked for this purpose in 2006-07 under the National Horticulture Mission. A Central Institute of Horticulture will be established in Nagaland. The National Fisheries Development Board will be constituted shortly.
(2) Credit
2.1 Farm credit increased to Rs.125,309 crore in 2004-05 (well above the target) and is again expected to cross the target of Rs.141,500 crore set for the current year. To achieve and exceed the target of doubling farm credit in three years, it is proposed to ask the banks to increase the level of credit to Rs.175,000 crore in 2006-07 and also add another 50 lakh farmers to their portfolio. Since tenant farmers are not adequately served, the banks should open a separate window for self-help groups or joint liability groups of tenant farmers and ensure that a certain proportion of the total credit is extended to them. It is intended to monitor closely progress in this behalf. An amount equal to two percentage points of the borrower’s interest liability on the principal amount up to Rs.100,000, will be credited to the bank account of farmers who have availed of crop loans from scheduled commercial banks, RRBs and PACS for Kharif and Rabi 2005-06, before March 31, 2006. A sum of Rs.1,700 crore is provided for this purpose.
2.2 It is intended to ensure that NABARD continues to provide refinance at an economical rate, so that the farmer ultimately gets the loan at a reasonable rate. Accordingly, farmers obtaining short-term credit from the cooperative credit structure and Regional Rural Banks (RRBs), with refinance from NABARD, the Government has decided to ensure that the farmer receives short-term credit at 7 per cent, with an upper limit of Rs.300,000 on the principal amount. It is proposed to give the required level of subvention to NABARD. This policy will come into force with effect from Kharif 2006-07 and a detailed statement in this regard will be made in due course.
2.3 Keeping in view the expanding requirements for creating rural infrastructure it is proposed to increase the corpus of RIDF XII to Rs.10,000 crore and State Governments are urged to make the best use of these funds. Also propose to allow specified projects under the Public Private Partnership (PPP) model to access RIDF funds. A separate window is proposed to be opened under RIDF XII for rural roads with a corpus of Rs.4,000 crore during 2006-07.
2.4 Micro Finance: A window to access ECB funds has also been opened. A Bill to provide a formal statutory framework for the promotion, development and regulation of the micro finance sector will be introduced.
2.5 The banking sector is asked to credit-link another 385,000 SHGs in 2006-07. NABARD will also be asked to open a separate line of credit for financing farm production and investment activities through SHGs.
2.6 The findings of the NSS 59th Round (2003) revealed that out of the total number of cultivator households only 27 per cent receive credit from formal sources and 22 per cent from informal sources. The remaining households, mainly small and marginal farmers, have virtually no access to credit. With a view to bringing more cultivator households within the banking fold, it is proposed to appoint a Committee on Financial Inclusion. The Committee will be asked to identify the reasons for exclusion, and suggest a plan for designing and delivering credit to every household that seeks credit from lending institutions.
(3) Financial Sector
3.1 Banking, Insurance and Pensions: As part of the reforms in the banking sector introduced in 1993-94, capital was infused in the banks by issue of special securities. To date, Government has injected Rs.16,809 crore into nationalised banks. Adding the perpetual securities issued earlier, the total net capital support stands at Rs.22,808 crore. Due to the capital support, a sound banking sector meeting international norms has emerged. A stage is reached wherein the special arrangements between Government and the banks can be wound up. Accordingly, after consulting the RBI, it is proposed to unwind the special securities through conversion of these non-tradable special securities into tradable, SLR Government of India dated securities. This will facilitate increased access of the banks to additional resources for lending to the productive sectors in the light of the increasing credit needs of the economy.
3.2 The Insurance Regulatory and Development Authority and the Government has examined the report of K.P. Narasimhan Committee appointed to recommend a comprehensive law on insurance. It is intended to introduce a comprehensive Bill on insurance in 2006-07.
3.3 Capital Market: The capital market has attracted a great deal of attention in recent months. The measures taken in the last year-and-a-half have deepened, broadened and strengthened the market. It is necessary to take more measures. Hence, it is proposed to:
· Increase the limit on FII investment in Government securities from $ 1.75 billion to $ 2 billion and the limit on FII investment in corporate debt from $ 0.5 billion to $ 1.5 billion;
· To raise the ceiling on aggregate investment by mutual funds in overseas instruments from $ 1 billion to $ 2 billion and to remove the requirement of 10 per cent reciprocal share holding;
· To allow a limited number of qualified Indian mutual funds to invest, cumulatively up to $ 1 billion, in overseas exchange traded funds; and
· To set up an investor protection fund under the aegis of SEBI, funded by fines and penalties recovered by SEBI. This will bolster confidence among retail investors who should be the key drivers of the capital market.
3.4 Consultations have been held in this behalf with RBI and SEBI, who will issue the guidelines in due course.
3.5 RBI had introduced the anonymous electronic order matching trading module called NDS-OM on its Negotiated Dealing System. In the first phase, RBI-regulated entities, banks and primary dealers were allowed to trade on the system. The system has now been extended to all insurance entities. In view of the encouraging response of market participants and to further deepen the Government securities market, it is proposed to extend access to qualified mutual funds, provident funds and pension funds.
3.6 A high-level expert committee on corporate bonds was appointed in the previous budget. The committee has submitted its report and Government has accepted the recommendations. It is proposed to take steps to create a single, unified exchange-traded market for corporate bonds.
(4) Direct Taxes
4.1 It is proposed to include investments in fixed deposits in scheduled banks for a term of not less than five years in section 80C of the Income Tax Act. It is also proposed to remove the limit of Rs.10,000 in respect of contribution to certain pension funds in section 80CCC, subject to the overall ceiling of Rs.100,000.
4.2 Revisiting the exemptions in the Income Tax Act it is proposed to remove the exemption under section 10(23G) which is not relevant when interest rates are moderate.
4.3 Cooperative banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a special footing and will continue to be exempt from tax under section 80P of the Income Tax Act. However, it is proposed to exclude all other cooperative banks from the scope of that section.
4.4 Section 54EC and section 54ED are tax shelters. It is proposed to restrict the scope of section 54EC to two institutions, viz., NHAI and REC. For NABARD, SIDBI and NHB, which are banks, the route of zero coupon bonds have already been opened to raise low cost funds. Government will, if needed, provide appropriate support to these institutions to enable them to access resources to fulfill their mandate effectively. It is also proposed to withdraw the benefit of section 54ED, which has become virtually redundant, with effect from April 1, 2006.
4.5 The Standing Committee on Finance had expressed concern that many charitable institutions misuse the provisions of the Income Tax Act. Hence it is proposed to focus on one misuse, namely, receiving anonymous or pseudonymous donations. Accordingly, it is proposed that anonymous or pseudonymous donations to wholly charitable institutions will be taxed at the highest marginal rate. Such donations to partly religious and partly charitable institutions/trusts will be taxed only if the donation is specifically for an educational or medical purpose. However, such donations to wholly religious institutions and religious trusts will not be covered by the new provision.
4.6 The Banking Cash Transaction Tax (BCTT) introduced last year has helped the Department of Income Tax to detect laundering of funds, bogus bills, accommodation entries, artificial loss claims and dummy firms. Hence, it is proposed to continue the BCTT for some more time until the AIR system is able to capture all significant financial transactions.
(5) Indirect Taxes
5.1 Service Tax: In 2005-06, the services sector is estimated to contribute 54 per cent of GDP. It is proposed to bring more services under the service tax net. The new services to be covered include ATM operations, maintenance and management; registrars, share transfer agents and bankers to an issue; sale of space or time, other than in the print media, for advertisements; sponsorship of events, other than sports events, by companies; international air travel excluding economy class passengers; container services on rail, excluding the railway freight charges; business support services; auctioneering; recovery agents; ship management services; travel on cruise ships; and public relations management services.
5.2 On increase in the service tax Hon’ble FM said “there is a large consensus that the country should move towards a national level Goods and Services Tax (GST) that should be shared between the Centre and the States. I propose that we set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST. Hence, we must progressively converge the service tax rate and the CENVAT rate. I propose to take one step this year and increase the service tax rate from 10 per cent to 12 per cent.”
IMPLICATIONS OF UNION
BUDGET FOR 2006-07:
Quick Comment: Union Budget for the year 2004-05 allowed the Rural Cooperative Credit Delivery System to remain unhealthy. Union Budget for the year 2005-06 was rated as disappointing, disgusting and frustrating to Rural Cooperative Credit and Banking Institutions.
A quick look into proposals of Union Budget for the year 2006-07 pertaining only to Cooperative Credit and banking Institutions reveals a gloomy picture to them. The proposals do not indicate any intent to strengthen these institutions. The proposals do not reflect the objective of Common Minimum Programme on rural cooperative credit delivery system mainly the assurance to nurse the system back to health. On the contrary, the proposals either aimed at further weakening the State Cooperative Banks (SCBs) / District Central Cooperative Banks (DCCBs) financially by proposing to withdraw the concession allowed under Section 80P of the Income Tax Act or by discriminating scheduled and non- scheduled banks. The proposals to ensure lending short term farm loan at the rate of 7 percent to the ultimate borrower is no doubt welcome, the steps to be taken to lend it at the rate of 7 percent through rural cooperative credit institutions is not specified and left it ambiguous. In the absence of a specific strategy towards lending policy, the Cooperative Credit Institutions (CCIs) in the present form will find it difficult to implement this proposal and ultimately collapse. CCIs, even today, are facing constraints to lend the short term loan even at the rate of 9 percent. The issue of recapitalization to short term cooperative credit institutions viz. PACS / DCCBs / SCBs remained pending in spite of a number of assurances. The proposal is completely silent on the strengthening measures to these institutions.
The proposal-wise implications are analysed as follows:
1. Credit: We are glad not to notice any adverse comment on the performance of cooperative banks in disbursing the agriculture loans as a part of doubling of agriculture credit. During the budget proposal for the year 2005-06, Union Finance Minister observed “not withstanding the below par performance of cooperative banks”, the commercial banks, RRBs and cooperatives together will disburse Rs. 108,000 crores in 2004-05 out of the target of Rs. 105,000. It is heartening to note that farm credit increased to Rs. 125,309 crores in 2004-05, well above the target. The year-wise targets fixed for credit flow to agriculture is given below:
|
Sr. |
|
Target Rs. in crores |
||
|
No. |
Agencies |
2004-05 |
2005-06 |
2006-07 |
|
1. |
Commercial Banks |
57,000 |
87,000 |
- |
|
2. |
Cooperative Banks |
39,000 |
39,600 |
- |
|
3. |
RRBs |
8,500 |
15,200 |
- |
|
|
Total |
1,04,500 (say 1,05,000) |
1,42,000 |
1,75,000 |
Union Finance Minister, expects the farm credit to cross the target of Rs.1,41,500 (say Rs. 1,42,000) a target set for the 2005-06. Encouraged by the results, he proposed to ask the banks to increase the level of credit to Rs. 1,75,000 crores in 2006-07. But the agency-wise target is yet to be fixed.
The cooperative banks in the absence of specific strengthening measures to ensure their financial viability, will have constraints to meet the target, even at the present level. Absence of recapitalization, proposal to reduce the rate of interest on the short term farm loan to the ultimate borrower, proposal to exclude SCBs and DCCBs from the scope of Section 80P of the Income Tax Act etc. reduces the ability of CCIs to achieve the target to fulfill the desire to double the agriculture credit in three years. Therefore, it is suggested to initiate immediate strengthening measures to facilitate them to contribute significantly to the target of doubling of agriculture credit in the next three years and this should be done by April 01, 2006. NABARD is suggested to release their S.T. SAO policy document for the year 2006-07 by April 01, 2006 with appropriate comprehensive and comprehendible guidelines.
2. Interest Liability: The proposal to credit, on or before 31 March, 2006, to the bank account of farmer an amount equal to two percent points of the borrowers’ interest liability on the principle amount to Rs. 100,000, who have availed crop loans from PACS for Kharif and Rabi 2005-06, is welcome. We welcome release of Rs.1700 crores to NABARD.
3. NABARD – Refinance Policy – Rate of Interest on Farm Loan: We wholeheartedly welcome the strong intention of Union Finance Minister to ensure continuation of refinance from NABARD for Farm Loans at an economic rate. We understand it (economic rate) as concessional rate. We also welcome the proposal to ensure providing short term farm credit to farmers at 7 percent through Cooperative Credit Structure (CCS) (and Regional Rural Banks) with refinance from NABARD, with an upper limit of Rs.300,000 on the principle amount. The proposed policy is expected to come in force with effect from Kharif 2006-07. While the CCS is too willing to lend farm credit at 7 percent, the following measures may have to be initiated to fulfill his strong intentions without further weakening cooperatives:
a. Volume of concessional refinance for agriculture credit by NABARD should be to the extent of 85 percent of the total requirement i.e. the grass root level outstandings with no restrictions which includes availability of refinance to SCBs / DCCBs, not complying Section 11(1) of the B. R. Act.
b. The rate of interest on the 85 percent should be uniform and it should be at 3 percent to SCBs on behalf of DCCBs.
c. SCBs and DCCBs shall ensure the availability of farm credit to PACS at the rate of 4.75 percent, after availing a margin of 0.25 percent and 1.50 percent respectively.
d. The ultimate borrower will get short term farm credit at 7 percent.
e. The above procedure facilitates SCBs / DCCBs to maintain a strong viable financial portfolio by deploying their resources in a remunerative manner, over a period of next 10 years. Refinance Policy of NABARD on ST SAO, especially rate of interest may be reviewed after this period.
f. The difficulties in implementing the previous policy of lending farm credit at 9 percent need to be appreciated.
g. An attempt to implement the scheme of direct refinance to DCCBs by NABARD did not take-off. In fact, it is futile exercise as it shall not achieve the objective of lending farm credit at a lower rate of interest to eligible farmer borrowers.
h. SCBs / DCCBs shall have to improve their efficiency and reduce operating costs etc. and help the lower tier.
i. Implement strengthening measures to Cooperative Credit Structure / recapitalization to Cooperative Credit Structure at the earliest and bring them to take-off stage.
j. SCBs / DCCBs will not be requiring any external assistance after these steps are initiated.
k. The above measures also help to achieve the target for doubling of farm credit in three years.
4. RIDF: We do not have any further comments on RIDF than what we have been making since the genesis of RIDF.
5. SHG: A separate line of credit for financing farm production and investment activities through SHGs is welcome. However, it may be limited to the SHGs promoted by Cooperative Credit Structure.
6. Financial Sector:
Recapitalization: Union Finance Minister acknowledged that due to net capital support of Rs. 22,808 crores to nationalised banks, a sound banking sector meeting international norms has emerged.
According to Union Finance Minister, Union Cabinet accepted the recommendations of the Task Force on ‘Revival of Cooperative Credit Institutions’, set up under the Chairmanship of Prof. A. Vaidyanathan and cleared a sum of Rs. 13596 crores revival package for revitalizing the Short Term Cooperative Credit Structure in the country. The recommended share of liability of recapitalization is 68 percent by Government of India, 28 percent by State Government and 4 percent by CCS units.
Union Budget, it is shocking to observe, is silent on the proposals to revive the Cooperative Credit Institutions.
The budget proposals such as (1) excluding SCBs / DCCBs from the provisions of Section 80P of the Income tax Act, (2) non inclusion of non-scheduled SCBs / DCCBs to qualify for exemption under Section 80(c) of Income tax, (3) expecting the cooperatives to lend Short Term Farm Credit at 7 percent without reviving them, (4) Expecting cooperatives to work for achieving the target for doubling of agriculture credit knowing well about their known financial constraints and (5) absence of budget proposals on revised revival package of CCS; are all appear to be indicators of looking for alternatives to cooperatives. This should not be allowed to happen. As in the case of previous budget, the Union Budget proposals for the year 2006-07 do not reflect the sincere concern of the Government of India to nurse the Rural Cooperative Credit Delivery System back to health.
Once again, the realization of the fact that unless the cooperative banks are healthy, it would not be possible to reach credit to every farmer in need of credit, did not reflect in the Union Budget for the year 2006-07.
7. Direct Taxes:
Investments in Fixed Deposits in scheduled banks: It is proposed to include investments in fixed deposits in scheduled banks for a term of not less than five years in section 80C of the Income Tax Act, 1961.
Out of 30 member SCBs of NAFSCOB, 16 have been accorded scheduled status as per RBI Act 1934. Not even a single DCCB in the country is included in the second schedule of Reserve Bank of India in spite of repeated appeals to accord scheduled status to them.
The current budget proposal will certainly affect the non-scheduled SCBs and all DCCBs in mobilization of resources and they may face flight of deposits. The proposal amounts to discriminating these banking institutions in the country.
Therefore, it is suggested to include investments in fixed deposits in both scheduled and non-scheduled SCBs/DCCBs for a term of not less than five years in Section 80(c) of the Income Tax Act. This means that fixed deposits with all SCBs and DCCBs for a period of five years should be allowed to qualify for investment under Section 80(c) of the Income Tax Act for getting benefit of tax rebate.
8. Section 80P of the Income Tax Act: Section 80P, inter-alia, provides for a deduction from the total income of the cooperative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members etc. Shri P. Chidambaram, Hon’ble Union Finance Minister, in the Union Budget for the year 2006-07 has proposed to restrict the exemptions under Section 80P of Income Tax only to the Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) at the taluk level, thereby excluding the State Cooperative Banks (SCBs) and District Central Cooperative Banks (DCCBs) from the provisions of the said section of the Income Tax Act. The full text of his Budget proposal in this regard is as follows:
“Cooperative Banks, like any other bank, are lending institutions and should pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) stand on a special footing and will continue to be exempt from tax under Section 80P of the Income Tax Act. However, I proposed to exclude all other Cooperative Banks from the scope of that Section”
In the Finance Bill under chapter II at point No. 19 it is written that " In section 80 P of the Income Tax Act, after sub section (3), the following shall be inserted w.e.f. the lst day of April 2007, namely:- (4) The provisions of this section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank.
Explanation - for the purpose of this sub section –
a. "Cooperative Bank" and "Primary Agricultural Credit Society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949.
b. "Primary Cooperative Agricultural and Rural Development Bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long term credit for agricultural and rural development activities.
Under explanatory memorandum of the Finance Bill, the rate of income tax for Cooperative Banks are proposed as "In the case of Cooperative Societies, the rate of income tax have been specified in paragraph B of part III of the Ist schedule to the bill. These rates are the same as those specified in the corresponding paragraph of part I of the Ist schedule to the Bill and will continue to be same as that for assessment year 2006-2007. No surcharge shall be levied.
Further under the explanatory note under the head withdrawal of tax benefit available to certain cooperative banks, it is prescribed that "The Cooperative Banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. It is, therefore, proposed to amend section 80P by inserting a new sub section (4) so as to provide that the provisions of the said section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank. It is also proposed to define the expressions "cooperative bank". "Primary agricultural credit society" and "Primary cooperative agricultural and rural development bank". It is also proposed to insert a new sub clause (VII -a) in clause (24) of the said section so as to provide that the profits and gains of any business of banking including providing credit facilities carried on by cooperative society with its members shall be included in the definition of income”. The amendment will take effect from lst April 2007 and will accordingly apply in relation to the assessment year 2007-2008 and subsequent years. (Clauses 3 and 19)
The rate of income tax as prescribed at paragraph "B: of part III of lst schedule to the bill are as under:-
|
1. where the total income does not exceed Rs. 10,000 |
10 per cent of the total income. |
|
2. where the total income exceeds Rs. 10,000 but does not exceed Rs. 20,000 |
Rs. 1,000 plus 20 percent 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 percent of the amount by which the total income exceeds Rs.20,000 |
The above details in the speech of Hon'ble Finance Minister and the contents of the Finance Bill clearly indicate that the income tax exemption available to cooperative banks under the Income tax Act is now proposed to the withdrawn and as such a huge amount i.e. 30% of the profit before tax will require to be paid by the bank as Income tax to Government of India. Further it will have number of implications in booking the income and expenditure and also on other funds.
In this respect, there is a need to appreciate that the Institutional Rural Credit Delivery System for agriculture mainly consists of the Short Term Cooperative Credit and Banking Institutions comprising of 32 SCBs with a network of 929 branches, 368 DCCBs with a network of 12866 branches and more than one lakh PACS. The SCBs at the apex level, DCCBs at the intermediary level and PACS at the village level have been envisaged as an effective channel for creating socio-economic development in the society. These institutions have been considered as the most suited and effective channels both as purveyors of credit and developmental agencies. Over the years these institutions contributed significantly for the rural and agriculture development for ensuring smooth flow of agricultural and rural credit. In fact, they promote and propagate the creation of a ‘Cooperative Common Wealth’ through socio-economic transformation of the community. The cooperative banks function on the principle of ‘mutuality’. It is well established in law that no tax can be levied in respect of profits of truly mutual societies on the reasoning that no one can make a profit out of one self. This concession is given in the form of deduction of whole of the profits from their business including the banking operations. A very significant part of the income of SCBs and DCCBs are derived out of doing business with the members. Such incomes from the stand point of principle of mutuality would be outside the ambit of tax as they are more in the nature of ‘surplus’ rather than income.
The major portfolio of the Cooperative Credit and Banking Institutions continues to be agriculture and agri-based credit portfolios. About 75% to 80% of such credit requirements are met by these institutions. The profitability of these institutions is very low and the margin available in their operations is too insignificant. They have to fight an unequal battle with commercial banks in terms of mobilization of resources. Further, handicapped in terms of network, technology and capital base, the cooperative banks have not been able to attract large interest free Current Account funds from corporates and Government bodies. They are constrained to raise their resources at a very high rate of interest as compared to the commercial banks and / or other lending institutions. For cooperative banks the avenues for raising capital is very limited. In the context of limited share capital, they have to necessarily create higher reserves which also help them in reducing cost of funds. Some provisions of State Cooperative Societies Acts provide for compulsory contribution to reserves created. If their income is taxed they will have very little surplus left to create reserves at the required rate. The commercial banks mainly cater to the industries, trading houses and are largely concentrated in the urban and semi-urban areas. A good percentage of their income comes from non-fund based activities many of which are out of reach of the cooperative banks. They have been unable to fulfil the 18% target of agricultural lending set for them and have been reaching their target by contributing to the RIDF at the level of NABARD. The commercial banks and cooperative banks are not comparable entities. Hence, it is incorrect to say that cooperative banks are functioning at par with other commercial banks. The fact that cooperative banks required their income to be treated differently was very much clear to the lawmakers. Hence the planners had granted special relief to cooperative banks under Section 80P of the Income Tax Act. The proposal to exclude all other cooperative banks except the PACS and PCARDBs at taluk level will harm the entire cooperative credit structure with significant financial damage to the SCBs and DCCBs.
Therefore, there is a need to restore the provisions of Section 80P of Income Tax Act for State Cooperative Banks and District Central Cooperative Banks.
9. Indirect Taxes:
Service Tax: More services are proposed to be brought under the net of service tax. Proposal of levying service tax on services such as ATM operations may discourage the customers to get used to modernization. The Union Finance Minister may kindly re-look into the proposal to withdraw the services from the service tax net. Further, service tax rate proposed to be increased from 10.2 percent to 12.2 percent may also be withdrawn (inclusive of education cess of 0.2 percent).