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Proposed provisions in respect of cooperative societies in Direct Tax Code 2010


1.  India is a country of diversity. This is true not only for geography, culture and religion but also for business models. Apart from capitalism and socialism, the country has a large number of business enterprises under cooperative sector also. After independence, through the successive five year plans, Government policies towards cooperative sector are evolved in such a way that now it has carved an important place in business India. A cooperative business enterprise is generally established to bring together economic resources from members, to put the same for collective economic activities and share the fruits of common efforts among the stakeholders.


2.   The provisions of Income Tax Act, 1961, as applicable at present, even though not very complimentary towards cooperative societies, are much better than the proposed provisions in Direct Tax Code, 2010 (DTC). The proposed provisions of DTC are not only unfriendly towards cooperative societies but also against the principle of cooperation. In the attached comparative statement of provisions of Income Tax Act and DTC, it is clear that the proposed provisions will put the cooperative sector in worst position in respect of taxability of income.


3.   As per clause 10 of DTC, income of a cooperative society from any activity can be declared exempt to any extent by Central Government. Such provision is not in the present Income Tax Act. It is feared that such discretionary provision may be misused either to favour or influence cooperative sector.


Deduction of provision for bad & doubtful debts

4.  Under the existing provisions of section 36(1)(viia), any provision for bad & doubtful debts made by a scheduled bank, non-scheduled bank and a cooperative bank to the extent of 7.5% of total income is deductible from taxable income. However, under the proposed clause 35(3)(c) of DTC, the provision for bad & doubtful debts, not exceeding 1% of aggregate average advances is deductible only for financial institution. As per the definition of ‘financial institution’ in clause 314(99), non-scheduled cooperative bank in not covered. It means non-scheduled cooperative bank will not be entitled for deduction under clause 35(3)(c) which will otherwise be available to all other banks.


5.  Similarly, interest on bad & doubtful debts of a ‘financial institution’ is taxable in the year in which the same is credited to P & L A/c or in the year in which the same is actually received. It means accrued interest on bad & doubtful advances will not be taxable if the same is not credited or received. However, as explained above the term ‘financial institution’ will not cover a non-scheduled cooperative bank. As a result any interest income accrued on bad & doubtful advances, even though not received, will be taxable in the hands of a non-scheduled cooperative bank. This will put such cooperative banks in much hardship.


Changes in provisions of section 80P -

6.  Major changes are proposed in the existing provisions of section 80P. This section provides deduction of 100% incomes of certain cooperative societies as well as 100% deduction of certain incomes to all cooperative societies. E.g. 100% deductions of incomes earned by cooperatives engaged in agriculture (including fishing), cottage industry, banking business, disposal of labour, supply of milk, oilseeds, fruits, vegetables etc. In the proposed provisions of clause 85 and 86, deductions of incomes of are provided only for cooperative societies engaged in ‘agriculture-related activities’ (other than processing of agriculture produce). As such all other cooperative societies will lose full deduction of their incomes from activities other than agriculture-related activities. This will be a great blow on the financial viability of such cooperatives.


7.  Under the existing provisions of section 80P, incomes by way of interest or dividend from investments in other cooperative society and rent from godowns are fully deductible. However, these provisions are absent in DTC. It means henceforth such incomes earned by a cooperative society will be fully taxable.


TDS from interest incomes –

8.  As per the existing provisions of Income Tax Act, no TDS is necessary from interest paid by a cooperative society to its members and to other cooperative society. In DTC, these provisions are deleted. It means all cooperative societies, including cooperative bank and cooperative credit society, will have to deduct tax from interest paid to its members and comply with all other provisions in respect of TDS certificates, returns etc. This will adversely affect deposit mobilisation of cooperative societies as well as increase administrative and compliance workload on cooperative sector.


9.  Besides, as per the proposed provisions of DTC, a member of a cooperative society (other than a cooperative bank) will have to deduct tax from the amounts of interest paid on loans taken from such cooperative society. This is going to hit hard to all cooperative credit societies. The members of such cooperative credit societies, including primary agricultural credit societies, are illiterate, spread over rural areas and do not have access to professional help will have to comply with these provisions.


Demands from cooperative sector –

10.  Considering the proposed changes in the provisions of DTC, following demands should be placed before Hon’ble Finance Minister –


a)   All existing 100% deductions to cooperative societies under section 80P should be restored. All other cooperative societies should have minimum limit of taxfree incomes.

b)  All the proposed provisions as applicable to ‘scheduled banks’ be made applicable to ‘cooperative banks’

c)   100% deduction should be allowed to all amounts that need to be debited to Profit & Loss Account by a cooperative society as per provisions of any statue or regulatory authority (both central and state and including RBI) applicable to such cooperative society.

d)   Interest incomes, either received by a cooperative society from its members or paid by a cooperative society to its members, should not be covered by the provisions of TDS.

e)   100% exemption should be allowed for dividend received from a cooperative society.


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