Minor tax relief for banks on bad debt provisioning

Finance Minister Arun Jaitley sought to soothe public sector banks facing NPA (non-performing assets) pain by handing out tax relief, albeit much lower than their demand. The Budget provides that banks will be allowed tax deduction for NPA provisioning up to a limit of 8.5 per cent of their total income, against the current limit of 7.5 per cent of total income.

“This will reduce the tax liability of banks,” Jaitley said in his Budget speech.

In the run-up to the Budget, the Reserve Bank of India had, in the wake of demonetisation, urged Jaitley to allow banks to avail of full tax deduction on the provisions made toward bad debts.

Any such facility of full tax deduction is expected to come handy for banks, which are faced with challenges of demonetisation and sluggish loan recoveries in the third quarter (October-December), the RBI said.

However, the Budget has only partially delivered on this front.

Meanwhile, Jaitley also said that he proposes to tax interest receivable on actual-receipt basis instead of accrual basis in respect of NPA accounts of all non-scheduled cooperative banks and bring them at par with scheduled banks.

“This will remove the hardship of having to pay tax even when interest income is not realised,” he added.

As far as the capital requirements of public sector banks go, the Budget has provided ₹10,000 crore for the same. Most non-banking finance companies (NBFCs) were disappointed that the Budget did not enhance the tax deduction for the sector on the NPA provisioning front.

“While the RBI is bringing convergence in regulation for NBFCs with banks, it is imprudent that on the tax front we see divergence,” Raman Aggarwal, Chairman, Finance Industry Development Council, a representative body for asset-financing NBFCs, told BusinessLine .

This Budget has extended the provision of Section 43D of the Income Tax Act (taxing interest on receipt basis) to co-operative banks also (already available to scheduled commercial banks), but NBFCs have been kept out, he rued.

“To deny NBFCs coverage under Section 43D is disappointing. Moreover, there has been no increase for NBFCs for bad debt provisioning (it is currently 5 per cent).

“Why should NBFCs be subject to such discrimination and negative bias when we talk of regulatory convergence of all financial entities?” asked Aggarwal.

He said the RBI’s objective to bring activity-based regulation and not entity-based regulation has to be matched with a similar approach in matters relating to taxation.

In the run-up to the Budget, FIDC had suggested that eligibility norms for NBFCs to avail refinance from MUDRA should be made favourable. This would enable small and medium-sized NBFCs to shift from acceptance of public deposits to refinance from MUDRA, it had said.

A case for removal of the minimum loan ticket size of ₹1 crore for NBFCs to use the Sarfaesi law for recovery of dues was also made. That has also not been accepted by the government.

The Centre had on August 6 last year notified a 2015-16 Budget provision allowing NBFCs to avail of the Sarfaesi law for recovery of dues.

However, it had been stipulated that the law would be available only in cases where the minimum lending ticket size is ₹1 crore. This had come as a surprise to the NBFC sector.

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