Banks have sought higher income tax deduction, in sync with the higher provisioning they are required to make for non-performing assets (NPAs) due to more stringent guidelines prescribed by the Reserve Bank of India (RBI). The Income Tax Act does not take into account the additional provisioning banks make while complying with RBI guidelines.
Under the Income Tax Act, banks are allowed deduction on NPA provisioning, up to 7.5% of the total income. In addition, they get deduction up to 10% of the advances by their rural branches. Foreign banks get deduction up to 5% of total income. Following an amendment, an additional relaxation was introduced, which entails deduction up to 5% of total NPAs but this is not extended to foreign banks.
There is a considerable divergence between provisioning for NPAs under RBI guidelines and those admissible under the IT Act. Banks are willing to make provisions according to RBI guidelines. They should be eligible for appropriate deduction against additional provisioning. RBI guidelines are mandatory, and not advisory.
The RBI carries out inspections to ensure that NPAs of the banks are classified in accordance with its norms and provisioning is made according to the guidelines, a banker said. RBI guidelines are based on international best practices.
The Indian Banks Association has suggested that Income Tax Law may be amended so that the present provision for bad and doubtful debts available under section 36 (1) (viia) of the Income Tax Act may reflect the actual provisioning made according to the RBI guidelines. The provisions for NPAs under the I-T Act precede the relevant RBI guidelines.
There is a difference between income determined according to the tax laws and the books of accounts maintained under RBI guidelines. Therefore, the deduction available is different in both cases.
The government must look at harmonising the income tax law and the RBI guidelines. Given the buoyancy in tax collections, this proposal should be considered in the forthcoming budget, said PriceWaterhouseCoopers executive director Rahul Garg.
For example, if there is a large provisioning for a bad loan that exceeds 7.5% of the total income, the bank cannot claim the entire amount of provision for deduction if it exceeds 7.5% of the total income. If a bank sets aside Rs 100 as provisioning and has a total income of Rs 1,000, it can claim deduction up to Rs 75.
Further, in case of a settlement on the loan going forward, if the bank recovers the amount larger than the deduction allowed for income tax purposes, the amount of deduction which stands recovered would need to be offered as income, he said.