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Journalism of Courage
With a view to promote “financial inclusion” among the rural poor, the Centre’s special committee on this initiative has suggested a slew of amendments to the Income Tax Act to promote microfinance institutions. The group has even proposed that the threshold for foreign equity in non-banking financial companies (NBFCs) engaged in microfinance be reduced in order to attract greater amount of foreign capital to this activity.
The interim suggestions of the “committee on financial inclusion” come barely a month ahead of the Budget, which Finance Minister P Chidambaram has said would pay attention to improving the condition of the marginalised farmer. The final report is expected next month.
The committee, chaired by C Rangarajan, chairman of the Prime Minister’s economic advisory council, has also suggested that suitable changes be made to let microfinance institutions offer remittance services to marginal- and small-farmer households, which migrate to prosperous states and cities for seasonal employment.
According to a rough calculation made by the committee, these people remit around Rs 24,000 crore annually. The only conduit for these remittances now is the post office that charges 5 per cent for delivering money orders.
While these ideas lie at the doorstep of the Reserve Bank of India, the committee has made detailed points on the amendments needed in the IT Act. The changes, which can be directly made by the finance ministry, include:
• Amendment to section 11(4) of the IT Act that would allow NGOs to invest in companies undertaking microfinance without prejudicing their tax status.
• Amendment to section 2(15) of the same Act to include microfinance as a charitable activity. This would benefit non-profit MFIs.
• Addition of a new section under 10(23) to make capital gains on equity investments in microfinance NBFCs tax exempt.
• Changes to section 35 to allow these NBFCs to treat expenses on setting up branches in states with low financial inclusion as expense for which they can get 150 per cent rebate. This would help overcome regional disparities
• Amend section 36(1) (viii) to allow these NBFCs to get a tax exemption on 40 per cent of their profits if they keep it in a special reserve as is allowed for housing and infrastructure projects
The committee also says an amendment is needed to the SEBI guidelines that currently prohibit venture capital funds from investing in NBFCs.
The current FIPB guidelines require a minimum $500,000 (Rs 2.25 crore) investment from a foreign entity, which in turn eliminates many “potential investors” from making investments, the group says. Pointing out that several “social investors are individuals with relatively modest means”, it says the threshold should be brought down to $50,000.
