KS Microfinance, which is regaining ground after being hit by the tightening of microfinance institutions (MFIs) in Andhra Pradesh, has now come under the radar of the service tax authorities.

The company last week received a notice for Rs34.25 crore dues from the tax authorities over categorisation of some of its loans.

The company has received a show-cause notice on October 23, 2012, to explain as to why the assignment of portfolio loans should not be classified under recovery agent service and the related income from asset assignment transaction should not be subject to service, the company said.

The notice relates to the period of fiscal 2008 and 2012 and indicates an amount of Rs34.25 crore as service tax on the income from asset assignment during the period. SKS has 30 days to respond.

The company will explain its stand to the authorities. The management including tax advisors believe that its position is likely to be upheld in the appellate process. Accordingly, no provision has been made as on September 30, 2012, for the amount indicated in the notice, the company said.

Meanwhile, for the quarter ended September 2012, the company has made a provision of about `233.57 crore towards its residual exposure in the Andhra Pradesh market.

With this, the company has completely provided for or written off the AP portfolio. The company has already written off about Rs1,200 crore that is stuck in the AP market after the recoveries turned difficult following a law regulating the MFIs in the state.

In fact, the provisioning has been dragging SKSs balance sheet despite a positive non-AP portfolio.

For the quarter, the company recorded Rs77.57 crore in revenue, marginally more than Rs74.48 crore posted in the sequential quarter.However, its operating losses shot up from sequential quarters Rs10.6 crore to about Rs231 crore, mainly due to the higher provisioning.

The company closed the quarter with a loss of about Rs262.15 crore as against
Rs38.83 crore in the sequential quarter and about Rs384.54 crore in the corresponding period of the previous year.

The net deferred tax asset amount to Rs557.06 crore as on September 2012 has not been recognised. The said sum will be available to offset tax on future taxable income. Once there is virtual certainty of future taxable profits supported by convincing evidence in accordance with the requirements of Accounting Standard 22 , deferred tax assets will be recognised, the company said.