Minor Tax Relief For Banks On Bad Debt Provisioning

Finance Minister Arun Jaitley sought to soothe public sector banks facing NPA (non-performing assets) pain by handing out tax relief, albeit much lower than their demand. The Budget provides that banks will be allowed tax deduction for NPA provisioning up to a limit of 8.5 per cent of their total income, against the current limit of 7.5 per cent of total income.

“This will reduce the tax liability of banks,” Jaitley said in his Budget speech.

In the run-up to the Budget, the Reserve Bank of India had, in the wake of demonetisation, urged Jaitley to allow banks to avail of full tax deduction on the provisions made toward bad debts.

Any such facility of full tax deduction is expected to come handy for banks, which are faced with challenges of demonetisation and sluggish loan recoveries in the third quarter (October-December), the RBI said.

However, the Budget has only partially delivered on this front.

Meanwhile, Jaitley also said that he proposes to tax interest receivable on actual-receipt basis instead of accrual basis in respect of NPA accounts of all non-scheduled cooperative banks and bring them at par with scheduled banks.

“This will remove the hardship of having to pay tax even when interest income is not realised,” he added.

As far as the capital requirements of public sector banks go, the Budget has provided ₹10,000 crore for the same. Most non-banking finance companies (NBFCs) were disappointed that the Budget did not enhance the tax deduction for the sector on the NPA provisioning front.

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Author: Businessline