Specialised housing finance companies (HFCs) may have to pay more tax on their profits during 2007-08. This, in turn, will hit their profit after tax (PAT). Buried in the explanatory notes to Budget 2007-08 is a proposal to reduce the quantum of profit to be transferred to a special reserve to 20% of profit, against the existing norm of 40% of profit.

Top honchos at several HFCs feels that the proposed change would result in more tax payments in 2007-08. Their PAT will also be affected to that extent. They may also have to shoulder an increased burden by way of dividend tax payment, which is proposed to be raised to 15% from 12.5%.

The rationalisation of provisions relating to deduction in respect of creation and maintenance of special reserve is mentioned under Section 36 (1) (viii) of the Income-tax Act. The impact will be more for companies that avail of the maximum benefit of transferring profit to the special reserve.

GIC Housing Finance managing director A K Guha said: Tax burden in 2007-08 will go up for such companies which used to transfer more than 20% of their profit to the special reserve. In case of GICHF, our tax payment will rise significantly as we had used the full benefit under Section 36 (1) (viii) last year.

There will be a matching impact on HFCs profits after tax in 2007-08. As a result, the net profit after tax of HFCs will be affected as the HFCs will be required to pay more taxes on their the profit, said DHFL Vysya Housing Finance managing director R Nambirajan.

This will make HFCs more hardpressed during 2007-08. The HFCs are already facing a slowdown in their business growth amid rise in interest rates. Besides, the rise in cement prices may also impact their growth adversely.