Move comes on heels of FinMin request to banks for a minimum dividend of ₹6,803 cr

In a controversial move, the Finance Ministry has advised banks to remit the tax deducted at source (TDS) on salary, rent and credit of interest on deposits to the Government account by March-end, almost a month ahead of the designated due date.

Bankers say this advisory contradicts Income Tax Rules, which allow banks time up to April 30 to deposit TDS when the income or amount liable for TDS is credited or paid during the month of March. Moreover, it could raise the hackles of bankers and minority shareholders.

Desperate move?

According to market experts, this could be a desperate move by the Ministry to ensure that the “red line” Finance Minister P Chidambaram has drawn on the fiscal deficit is not crossed. Chidambaram had said the deficit would not exceed 4.8 per cent of GDP.

The TDS advisory, coupled with the Finance Minister’s request to public sector bank chiefs in October to ensure that dividend payable to the Government in 2013-14 is not less than the ₹6,803 crore paid in 2012-13, could be aimed at shoring up Government finances.

State Bank of India, Bank of Baroda, Bank of India and Punjab National Bank had declared handsome interim dividends after announcing their third-quarter results. The Central Government, as the majority shareholder in these banks, is the main beneficiary of the dividends.

Late February, the Secretary to the Department of Financial Services had requested the Indian Banks’ Association to issue directions to all its member-banks to ensure that apart from remitting TDS on salary and rent within the current financial year, the TDS on credit of interest may be remitted to the Government account in March itself, ‘in accordance with the law.’

‘Not in line with tax rules’

Bankers point out that the Ministry’s advisory is not in accordance with Income Tax Rules.

Last week, IBA, at the Ministry’s behest, issued an advisory on TDS to its member banks for implementation.

TDS aims at collection of revenue at the very source of income. It is the amount deducted from payments of various kinds such as salary, interest, contract payment, commission, etc.

The tax amount deducted at source can be adjusted against the depositor’s tax due. The TDS rate varies from one per cent to 30 per cent depending on the nature of payment.

Float money

If banks remit TDS in March itself they will not be able to utilise the float money (which could run into a few thousand crore rupees) that is otherwise available to them (to earn returns) before actually remitting the TDS amount to the Government.

According to Shravan Sharma, Chartered Accountant: “This advisory short-changes minority shareholders of banks, especially public sector banks. Banks are losing an opportunity to earn returns and create value for their shareholders.

“One month has been given to TDS deductors such as banks under Income Tax rules to remit TDS to the Government so that they don’t make mistakes in calculation. If a bank makes excess TDS payment it will not get refund but in case of underpayment it is slapped with a penalty.”

A senior public sector bank official said that while Government-owned banks will implement the advisory, it remains to be seen if private sector and foreign banks will bite the bullet.

(This article was published on March 18, 2014)
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