NEW DELHI: The finance ministry is mulling increasing the tax deduction limit for banks and non-banking financial companies (NDFCs) given the huge amount of bad loans which are likely to accrue to the country’s financial system as a result of the pandemic.
Tax laws allow banks to claim up to 8.5 per cent of their gross total income in a year as deduction against their bad and doubtful loans, though in most cases the banks have to provide for higher non-performing assets (NPAs) and doubtful loans, according to RBI guidelines.
NBFCs, on the other hand, get a tax set off of just 5 per cent since 2017-18, despite making out
a case for parity with banks on this issue. Officials said they were considering raising the level to 10-12 per cent for banks and increasing the set-off for NBFCs too.
“We have been approached by bankers and by chambers of commerce asking for a higher set-off at 15 per cent and equating banks and NBFCs... however that may not be possible given certain structural problems,” said revenue department officials.
Banks have been given the facility of tax set-offs for bad loans since 1979 in the Finance Act of 1980, initially for rural loans, later extended to all loans in line with international practise. “The move is a good one as NPAs and stressed assets reported by banks are a percentage of their total advance which is far larger than their incomes.
The 8.5 per cent set off doesn’t really cover the NPA losses which in the aftermath of the pandemic is likely to bloat,” said Sanjay Bhattarachyya, former managing director of State Bank of India. Gross NPAs of banks are expected to rise to 10.1-10.6 by March 2021, according to a report published by ICRA last month. Meanwhile, the financial stability report released by the Reserve Bank of India in July had forecast gross NPAs of all banks to jump to as much as 8.5-12.5 per cent.
“We will also look into demands that the section 36(1)(via) which allows this set-off Is expanded to clarify that deduction could be allowed for all categories of loans for which the RBI guidelines allow,” officials added.