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To get or not to get tax sops, coop banks arent sure
March, 09th 2007

Cooperative banks which are on an acquisition spree may have to wait a while to enjoy tax-breaks on M&As. Finance minister P Chidambaram has only signalled the governments intention to extend tax benefits to these banks, saying that amalgamation and demerger of banking companies is tax neutral and this benefit will be extended to coopertaive banks.

However, no amendments have been proposed in the finance bill 2007 to translate the intention into reality. The tax break, when made available, would be in the form of a set off of the carry forward losses of the amalgamating company with the profits of the amalgamated company. Currently, the tax benefit for M&As in select sectors including banks is available under a provision in the Income Tax Act known as Section 72 A. The benefit is available to a stateowned bank that takes over a lossmaking public sector bank or a private bank. The State Bank of India and its subsidiaries also qualify for the tax incentive under this provision. Besides this, tax benefits are also available under Section 72 AA of the Income Tax Act to a bank that acquires another loss making bank under a scheme of amalgamation approved by the government.

The first bank to qualify for the tax break was Oriental Bank of Commerce. OBC took over Global Trust Bank under special conditions when a moratorium was declared on the operations of GTB and a scheme of merger was sanctioned by the government. IDBI Bank which acquired the erstwhile United Western Bank (UWB), last year, will also get the tax benefit. However, a private sector bank that acquires an weak bank does not qualify for tax reliefs under Section 72 A of the Income Tax Act. The tax break is also not available to foreign banks either.

Ahead of the 2007-08 Budget, the Indian Banks Association made out a case for granting tax incentives to cooperative banks for M&As. It was reckoned that the tax incentive could accelerate the process of acquisition of weak urban cooperative banks by the stronger ones. The budget announcement evoked a positive response from CEOs of cooperative banks, considering that these banks are already paying income tax on their profits. There is no mention of the word cooperative in the fine print, according to Satish Marathe, former chairman of Janakalyan Sahakari Bank and All India Joint secretary, Sahakar Bharati an institution involved in co-operative activism.

According to D Krishna, CEO, All India Federation of Urban Co-operative Banks, Section 72 A benefits are applicable only in case of a government notified mergers and not in case of a voluntary mergers. So there is no benefit to urban co-operative banks going in for voluntary acquisitions and mergers. Besides, section of the bankers say that such mergers has to be brought into force by the central bank or the countrys banking regulator to avail of the tax benefits. The Act also says that the amalgamating company was not... financially viable by reason of its liabilities, losses and other relevant factors; and that the amalgamation was in the public interest.

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