Money & Banking

Allow interest paid on PDIs as deductible expense to make it attractive again: Lenders to CBDT

K Ram Kumar Mumbai | Updated on April 29, 2019 Published on April 29, 2019

PDIs can be issued by Indian banks as bonds or debentures

In a bid to restore the attractiveness of raising funds via perpetual debt instrument (PDI) route, banks have suggested to the Central Board of Direct Taxes (CBDT) that interest paid on such borrowings should be allowed as deduction despite their classification as equity under Indian Accounting Standard (Ind AS).

As things stand, interest paid on PDIs are reckoned as interest on borrowings and deemed as an expense for calculating book profit under the current accounting standard, but the same under Ind AS cannot be treated as an expense when computing book profits as these instruments are classified as equity.

Hence, banks want the blow to their bottomline on this count alleviated. They want CBDT to allow interest paid on PDIs as an expense for computing book profit.

PDIs can be issued by Indian banks as bonds or debentures. They are subject to certain terms and conditions to qualify for inclusion in Additional Tier 1 Capital for capital adequacy purposes.

“If interest (paid on PDI) is treated as an admissible (chargeable) expense under the Income-Tax Act, it can be debited to the Profit & Loss (P&L) account. So, it will be paid out of a bank’s pre-tax profit. That means the profit to that extent will come down. But then, the Income-Tax burden will also get reduced.

“If PDI is treated as equity, dividend will have to be paid out of post-tax profit. Then it is like any appropriation such as dividend. This becomes very expensive for a bank as there will be no income tax benefit,” said BK Diwakara, former Executive Director, Central Bank of India.

Diwakara elaborated that under Basel II norms it was easier to raise capital via PDI route. Now, for PDIs to qualify as Tier-I (core) capital under Basel III, there are many restrictions (related to loss-absorption capacity; prohibition on purchase / funding of instruments; and when a call option can be exercised). So, PDIs have lost their sheen.

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Published on April 29, 2019
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