Laws Applicable to Banks
There is an elaborate legal framework governing the functioning of banks in India. The principal enactments, which govern the functioning of various types of banks, are:
1. Banking regulation act, 1949
It is an Act that consolidates the law relating to banking and provide for the nature of transaction carried on by banks in India. It contains the provisions of power of RBI to control advances by banking companies, accounts and audit of banks, restrictions as to minimum paid up capital and reserves, restrictions as to payment of dividends, validation of license granted by RBI to multi state co-operative societies. It also contains provisions of suspension of business and winding up of banking business. It contains 10 parts and 56 sections and 5 schedules
2. Banking companies (acquisition and transfer of undertakings) act, 1970
This Act provide provisions for the acquisition and transfer of the undertakings of certain banking companies, having regard to their size, resources, coverage and organization, in order to control the heights of the economy and to meet progressively, and serve better, the needs of development of the economy in conformity with national policy and objectives and for matter connected therewith or incidental thereto. It contains 5 chapters, 3 schedules and 21 sections
3. Banking companies (acquisition and transfer of undertakings) act, 1980
This Act provides provisions for the acquisition and transfer of the undertakings of certain banking companies, having regard to their size, resources, coverage and organisation, in order further to control the heights of the economy, to meet progressively, and serve better, the needs of the development of the economy and to promote the welfare of the people, in the conformity with the policy of the State towards securing the principles laid down in clauses (b) and (c) of article 39 of the Constitution and for matters connected therewith or incidental thereto. It contains 5 chapters, 3 schedules and 21 sections
4. State bank of india act, 1955
It is an Act that constituted State Bank for India and transferred to it the undertaking of the Imperial Bank of India and to provide for other matters connected therewith or incidental thereto. Its purpose is to extend the banking facilities on a large scale, more particularly in the rural and semi-urban areas, and for diverse other public purposes. It has 8 Chapters, 53 sections and 4 schedules
5. State bank of india (subsidiary banks) act, 1959
It is an Act that provides for the formation of certain Government or Government-associated bank as subsidiaries of the State Bank of India and for the constitution, management and control of the subsidiary banks so formed, and for matters connected therewith, or incidental thereto. It contains 8 chapters 65 sections and 1 schedule
6. Regional rural banks act, 1976
It is an Act that provide for the incorporation, regulation and winding up of Regional Rural Banks with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto. It has 7 chapters 34 sections and 1 schedule
7. Companies act, 1956
As per section 2 of Banking Regulation Act, 1949 the provisions of Banking Regulation Act, 1949 shall be in addition to, and not, save as hereinafter expressly provided, in derogation of the Companies Act, 1956 (1 of 1956), and any other law for the time being in force. The Banking Regulation Act is to be read as supplemental to the Companies Act. Hence the provisions relating to appointment, qualification, disqualification under companies act for company auditor applies to bank auditors also.
8. Co-operative societies act, 1912/the relevant state co-operative societies act.
It is an Act to facilitate the formation of Co-operative Societies for the promotion of thrift and self-help among agriculturists, artisans and persons of limited means, and for that purpose to amend the law relating to Co-operative Societies. It contains 50 sections
9. Information technology act, 2000
This act provide legal recognition for transactions carried out by means of electronic date interchange and other means of electronic communication, commonly referred to as “electronic commerce”, which involve the use of alternative to paper-based methods of communication and storage of information to facilitate electronic filing of documents with the Government agencies and further to amend the Indian Penal Code, the India Evidence Act, 1872, the Banker’s Books Evidence Act, 1891 and the Reserve Bank of India Act, 1934 and for matters connected therewith or incidental thereto. It contains 12 chapters, 94 sections and 4 schedules
10. Prevention of money laundering act, 2002
As per the provisions of the Act, every banking company, financial institution (which includes chit fund company, a co-operative bank, a housing finance institution and a non-banking financial company) and intermediary (which includes a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and any other intermediary associated with securities market and registered under section 12 of the Securities and Exchange Board of India Act, 1992) shall have to maintain a record of all the transactions; the nature and value of which has been prescribed in the Rules under the PMLA. Such transactions include:
(i) All cash transactions of the value of more than Rs 10 lakhs or its equivalent in foreign currency.
(ii) All series of cash transactions integrally connected to each other which have been valued below Rs 10 lakhs or its equivalent in foreign currency where such series of transactions take place within one calendar month.
(iii) All suspicious transactions whether or not made in cash and including, inter-alia, credits or debits into from any non monetary account such as Demat account, security account maintained by the registered intermediary.
11. Credit information (companies regulation act), 2005
This Act provides provisions for regulation of credit information companies and to facilitate efficient distribution of credit and for matters connected therewith or incidental thereto. It has 8 chapters, 37 sections and 1 schedule
12. Securitisation and reconstruction of financial assets and enforcement of security interest act, 2002
It is an Act to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. It has 6 chapters and 42 sections
13. Banking cash transaction tax (chapter vii of finance act, 2005)
The Finance Act, 2005 introduced a new levy, namely, the Banking Cash Transaction Tax on certain banking transactions. The provisions relating to levy of this tax are contained in Chapter VII (sections 93 to 112) of the Act. This Act came into force from 1st June 2005 The tax base for the purposes of BCTT is the value of taxable banking transaction. A taxable banking transaction has been defined in clause (8) of section 94 of the Finance Act, 2005. Broadly, there are two categories of transactions:
(i) Cash withdrawal – A cash withdrawal would fall within the scope of a taxable banking transaction if it satisfies the following conditions:
(a) The cash withdrawal (by whatever mode) is from an account other than a savings bank account.
(b) The account is maintained with any scheduled bank.
(c) The amount of cash withdrawn on a single day from the same account should exceed Rs. 25,000 in the case of an individual or a HUF or Rs. 1,00,000 in the case of any other person.
(ii) Receipt of cash on encashment of term deposits.
Similarly, a receipt of cash on encashment of term deposits would fall within the scope of a taxable banking transaction if it satisfies the following conditions:
(a) The cash is received on encashment of a term deposit or deposits.
(b) The term deposit or deposits are in any scheduled bank.
(c) The amount of cash received in a single day exceeds Rs. 25,000 in the case of a deposit or deposits in the name of an individual or a HUF or Rs. 1,00,000 in case of any other person
No BCCT shall be payable if amount of term deposit or deposits is credited to any account with the bank
BCCT is charged at the rate of 0.1 percent of every taxable banking transaction
14. Service tax (chapter v of finance act, 1994)
Chapter V of the Finance Act, 1994, introduced Service Tax in India in 1994. The Central Board of Excise & Customs (CBEC), Department of Revenue, Ministry of Finance, deals with the task of formulation of policy concerning levy and collection of Service Tax. Service tax rate was increased to 12% by Finance Act 2006. Some of the services related to banking covered in the service tax net are credit card services, merchant baking services, financial leasing services, security and foreign exchange services, advisory services, financial service, ATM operation, maintenance or management related services
15. Income tax act, 1961
The income of a Bank is chargeable to income tax under section 28, Profits and Gains of Business and Profession. Apart from normal deductions under section Chapter IV D. Certain Specific Sections deal with the income chargeable to tax of a banking company. Section 43D provides that interest income of bad and doubtful debts, i.e. NPAs shall be chargeable to tax in the year in which they are credited to the profit and loss account or the year in which they are received. Hence the banks are allowed to follow a Hybrid System of Accounting, which is banned in case of other assessees by virtue of section 145 of the Income tax act. The provision made on NPAs is also allowed as a deduction as against the normal rule under section 36(1)(viia) to the extent of 7.5% of Income (computed before any deduction under this clause and Chapter VI-A) under the act or 5% (10% in case of rural branch) of the NPAs as per books of account of the bank on the last day of previous year.
16. Securities transaction tax (chapter vii of finance (no 2) act, 2004)
This is applicable from 1st October 2004 .The STT is applicable at different rates on the value of the “taxable securities transaction,” which means a transaction of purchase and sale of securities entered into in a recognised stock exchange in India and is payable by the buyer and the seller of the securities.
The value of taxable securities transaction,
(i) in the case of taxable securities transactions relating to “ option in securities”, shall be the aggregate of the strike price and the option premium of such “options in securities”;
(ii) in the case of taxable securities transaction relating to “futures”, shall be the price at which such “futures” is traded; and
(iii) in the case of any other taxable securities transaction, shall be the price at which such securities are purchased.