Did the government’s decision to mandate the disclosure of the original source of funds result in an undesired burden on genuine businesses, especially banks and non-banking financial institutions? A pre-budget request from the industry chamber CII (Confederation of Indian Industry) to simplify various procedural compliances seems to suggest so.

The industry chamber argues that it is practically difficult for a borrower to ask a bank or financial institution to explain the source where the loan is given to the borrower and equally difficult for the bank or financial institution to determine the exact source when it is raising funds from multiple sources. CII also points out the difficulty in getting non-resident debt investors to explain the source of their funds. Stating that this provision is increasing the cost of borrowing for the entire industry and leading to litigations, the industry chamber wanted the forthcoming Budget to make provisions to exclude genuine borrowings.

It was in Finance Act 2022, the government brought in an amendment to bring in mandatory disclosure of the nature and source of any sum, whether in form of loan or borrowing, or any other liability credited in the books of a tax assessee while making the taxpaying entity responsible to explain the source of funds at the entity’s creditor’s level also.

Prior to amendment by Finance Act 2022, taxpayers were required to explain the ‘source’ of cash credits like loans and advances, share capital, etc., to explain the identity of the lender, the creditworthiness of the lender and the genuineness of lending. However, there was no requirement to explain the ‘source of source’ in the lender's hands i.e., from where the lender got the funds, its creditworthiness and genuineness.

CII said while the intent of the amendment was to catch dubious transactions (e.g., where the lender has given a loan from cash deposits made in his bank account), the language was very broad to cast onerous requirements on even genuine and bonafide loans like borrowings from regulated entities like banks/NBFCs, overseas borrowings by the issue of forex or rupee bonds, etc.

“Even banks/NBFCs need to explain ‘source of source’ of savings, current, fixed, recurring deposits from customers. Since credit is the lifeblood of commerce, this provision will severely impact ‘ease of doing business’ and cast a huge compliance burden on the entire industry,” CII said in its pre-budget memorandum submitted to the finance ministry.

The industry chamber wanted a carve-out in the rule to exclude genuine borrowings or power to be given to the Central Board of Direct Taxes (CBDT) to notify ‘white-list’ of bonafide cases like borrowings from banks, NBFCs and financial institutions, borrowing made by banks, NBFCs and financial institutions themselves, deposits, advances from customers accepted in the ordinary course of business, etc.

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