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Mumbai, July 1 Co-operative banks, under the aegis of the National Federation of Urban Cooperative Banks and Credit Societies, have moved the Union Finance Minister, Mr Pranab Mukherjee, to restore tax exemption on retained earnings. Restoration of the exemption will make available more lendable resources for these banks.

The banks pointed out that other than tapping existing member-shareholders, they hardly had any other avenues available to raise funds to grow their business as well as maintain the Reserve Bank of India’s prescribed minimum capital to risk-weighted adequacy ratio levels.

The Finance Act of 2006 brought retained earnings of co-operative banks under the tax net via Section 80(P) (4) of the Income Tax Act, 1961. In view of the difficulties being faced by them in raising capital, co-operative banks want restoration of tax exemption on retained earnings under Section 80(P)(2) (i).

Co-operative banks such as district central co-operative banks and state co-operative banks mainly finance the agriculture sector whereas urban co-operative banks finance small businesses, tiny industries, traders, vendors/ hawkers, artisans and provide loans to those in the lower socio-economic strata of society. Hence, the risk profile of co-operative banks’ assets is considerably higher.

“The revenue garnered by the government by levying tax on retained earnings of co-operative banks is not very significant and could be easily foregone to further the cause of financial inclusion. If the tax is done away with, it will augment the banks’ capital base, thereby increasing the availability of loans to marginal farmers, artisans, urban poor, traders, self-employed and lower middle class of the society,” said Mr D. Krishna, Chief Executive, National Federation of Urban Cooperative Banks and Credit Societies (NAFCUB).

Mr Krishna reasoned that the concept of ‘one-member-one-vote’ in the co-operative sector, absence of any co-relation between the net worth of a co-operative bank and its share value, absence of any trading platform for transfer of shares at market value, and above all the non-perpetual nature of shares of co-operatives, negated 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 a majority of countries .

According to NAFCUB, there are 1770 UCBs with an aggregate deposit base of Rs 1.38 lakh crore. Similarly, 369 DCCBs and 31 State cooperative banks together have Rs 1.32 lakh crore deposits. Collectively, co-operative banks account for less than 9 per cent of the deposits of commercial banks.

With the number of loan accounts above Rs 10 lakh increasing manifold over the last 10 years, the National Federation has sought extension of the jurisdiction of debt recovery tribunals to co-operative banks’ so that they can recover their dues through the tribunals.

The Federation wants Section 80C (of the Income Tax Act) benefits to be extended to long-term deposits of over 5 years placed with non-scheduled UCBs to prevent the shifting of deposits from non-scheduled to scheduled commercial and co-operative banks.

More Stories on : Co-operatives | Budget

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