In Finance Bill 2006, Mr. Chidambaram has withdrawn the tax deduction available to Co-operative banks under Section 80P on the footing that such banks are functioning at same level with other commercial banks, which do not enjoy such tax exemptions. Thus, co-operative banks should also pay tax on same levels as charged to commercial banks. However, the Tax benefit shall continue to be available to primary agricultural credit society or primary cooperative agricultural and rural development bank.

This has caught serious hostility from Urban Co-operative Banks. This move would make a serious dent in the profits for a sector already going through a lean phase. There are only 2000 UCBs in the country and a big chunk of those are in loss. The UCBs are contending that need to retain there profits to survive in the market. The members tend to withdraw there capital if they don’t pay them dividend of atleast 8-10% in a year. The investor faith in these banks is already bit shaken and unability to pay proper dividends would make situation worse. Plus, such banks are still legging far behind in technological upgradations as compared to other banks, thus funds are required to meet up that challenge and perform in presence of large commercial banks.

I believe that this deduction should be restored to provide relief to such banks. These are a very small part of our economy and even if MoF taxes them, the amount would be pretty negligible. Consider this; the average deposit base for a UCB is only Rs. 55 crores as compared to thousands of crores for other commercial banks.

Further, this step goes against concept of progressive taxation. The weaker section should be taxed at a lower rate, while more tax should be charged from strong section of society.

Thus MoF should consider withdrawing this proposal once again.

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