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Refund claims may rise on derivatives losses
April, 03rd 2008

Unexpected losses suffered by corporates, which were exposed to forex derivatives and lower profits for banks, could result in a rise in refund claims with the Income Tax Department.

Much after corporates paid out advance taxes for the year 2007-08, the Institute of Chartered Accountants of India (ICAI) revised accounting norms, forcing companies to make provisions for losses on derivative contracts. Also, banks and bond houses saw a major portion of their treasury profits vanish in the past two trading days of 2007-08. Government bond prices fell by over 50 paise in the past two days, after the government announced higher-than-expected inflation numbers.

According to reports, corporate losses on account of exposure to foreign exchange derivatives are expected to be over Rs 15,000 crore. Most of these losses have surfaced in the past two quarters. Also, most corporates had not factored in these losses while estimating their tax liabilities.

Sanjeev Shah, a Vadodara-based chartered accountant, said that since the ICAI guidelines came much later. Many companies, with derivatives exposures, have not factored in derivatives losses while calculating advance tax. He added that several small and medium enterprises have been sold these contracts. In some cases, the contracts are claimed to have been concluded over the phone. These businesses are now denying any liability.

According to Sudhir Kapadia, a Mumbai-based chartered accountant, there is nothing to support the view that there will be a general rise in advance tax claims. But he added that in specific cases where a company has suffered a derivatives loss, it can be assumed that one-thirds of the losses would be claimed as a refund.

Also, banks, which have sold derivatives contracts to corporates, stand to lose on many of these contracts since corporates are refusing to fulfil their contractual obligations. Banks are declaring these corporates as defaulters in order to drag them to the debt recovery tribunal for a speedy recovery. But the flip side of such a classification is that banks have to make provisions for non-performing loans. And it is not just the disputed derivatives contract that has to be classified as non-performing, the entire loan advanced to the corporate has to be treated as a bad loan and provided accordingly.

The extent of NPA provisioning will be known only after sometime since banking regulations require only those loans, which are overdue for three months, to be classified as NPAs.

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