Budget proposes tax neutral benefit for conversion of UCBs into banking company

In a move that will help cooperative banks to convert to banks, the Budget has proposed tax exemptions.

It has provided tax neutral benefit for conversion of urban cooperative bank into banking company.

“It is proposed to expand the scope of business reorganisation to include conversion of a primary co-operative bank to a banking company and the deductions available under Section 44DB of the Act shall also be made applicable in relation to such conversion,”said the Memorandum to the Financial Bill.

The Budget has also proposed that transfer of a capital asset by the primary co-operative bank to the banking company as a result of conversion shall not be treated as transfer under Section 47 of the Act. Consequently, the allotment of shares of the converted banking company to the shareholders of the predecessor primary co-operative bank shall not be treated as transfer under the said Section of the Act, it further said.

These amendments will take effect from April 1, and will accordingly apply to the assessment year 2021-22 and subsequent assessment years, it said.

The Reserve Bank of India had, in September 2018, permitted voluntary transition of primary cooperative banks [urban co-operative banks (UCB)] into small finance banks through transfer of Assets and Liabilities.

However, players say that the scheme has till now enthused few cooperative banks.

Vidyadhar Anaskar, President, Maharashtra Urban Cooperative Bank Federation, said the proposal aims to help cooperative banks that have applied to convert to an SFB.

The RBI had in January granted an “in-principle” approval to Shivalik Mercantile Co-operative Bank, an Uttar Pradesh-based multi-state urban co-operative bank, to transition into a small finance bank.

According to a recent statement, Shivalik Small Finance Bank (SSFB) will start its banking operations from April.

With the developments at Punjab and Maharasthra Cooperative Bank, the government and RBI have been working to improve governance and oversight of the co-operative banking system.