Banks will soon knock on the government’s door as they find themselves caught in the tax net while settling and rejigging loans to give distressed borrowers a second chance, reported The Economic Times.
Slices of loans waived to lessen the strain on defaulting borrowers are being interpreted as ‘benefits’ that lenders are passing on to borrowers under the new provisions the government has come out on tax deducted at source (TDS).
Even though there is no transfer of cash from the bank to the borrower, the extent of haircuts taken by lenders is imputed as ‘income’ for the borrower.
For instance, if a bank cuts the loan outstanding from ₹100 crore to ₹40 crore as the borrower is unable to repay or arrange periodic interest outgo, the bank will have to pay a 10% TDS of ₹6 crore on the ₹60 crore which is written off from the full loan amount.
“This would put an additional burden on banks in the course of loan restructuring. We feel this particular TDS provision was inserted without adequate consultation and understanding of the consequences. It’s a strange situation where the bank has to make a sacrifice on account of waiver as well as organise for TDS. We have decided to pursue the matter with the government,” a senior banker told ET.
The tax implication was pointed out by a banker at a recent meeting, following which the industry body, Indian Banks’ Association, decided at its managing committee meeting to send a representation to the government.
Multiple transactions are being included in the TDS provisions as this is the easiest manner in which the tax net can be widened as the payer is made liable for deduction as well as suffer the consequences for non-deduction.
According to senior chartered accountant Dilip Lakhani, “The scope of TDS seems to have been broadened. Prima facie, the provisions of Section 194R (dealing with TDS) may not apply to the banking industry when there is a settlement of loan with the borrower and a certain amount is written off in the process. However, the fear among bankers is probably emanating from the word ‘benefit’ in the new circular on TDS.”