A relaxation in stressed asset valuation norms, streamlining of NPA provisions, reduction in the tenure of tax-saving fixed deposits, and removal of GST on additional interest charged in case of defaults — these are among the banking sector’s proposals to the government ahead of the Budget.
Sources said banks have pushed for a relaxation in the valuation norms for stressed assets in order to comply with the Reserve Bank of India’s strict mandate to dispose off assets in a time-bound manner. The proposals, moved by the Indian Banks’ Association (IBA), includes a reduction in the tenure of tax-saving fixed deposits from five years to three years.
Banks end up disposing such items at a price which is far lower than the commercial price/ stamp duty valuation. The government should make an amendment by way of providing for an exemption from applying Section 43CA valuation in such cases, the IBA has said in its pre-Budget proposals to the government, according to industry sources.
Given the language of the section, banks are forced to pay taxes on notional profits in order to comply with RBI regulations on time-bound sale. Section 43CA prescribes that in case the consideration of a land, building or both (not being capital asset) is less than the value adopted as per stamp duty regulations, the latter will prevail.
“This creates a situation where the bank sells such assets without there being any ulterior motive of tax evasion. For income-tax however, the ready reckoner rate is applied,” IBA said.
The IBA said banks that enter into resolution deals with stressed borrowers often receive land, buildings etc in settlement of such debts. These items are listed as non-banking assets in financials of the bank. Banks receive strict mandate from the RBI to dispose of such non-banking assets in a time-bound manner. Given the strict timelines which are enforced by the banking regulator, banks are not able to do a commercial price discovery, IBA said.
Section 43CA valuation measure is put in place in order to discourage sale value reduction in favour of cash exchanges. Being regulated entities, banks cannot indulge in such activities. Further, in order to comply with RBI regulations, time-bound disposal is mandated, thwarting price discovery.
“Alternatively, in such cases, the valuation report which is received from a reputed valuer can be considered to be the fair market value of such non-banking asset,” it said.
In another proposal, the IBA said banks are receiving notices with respect to applicability of Goods and Services Tax (GST) on additional interest charged for delay in payment of EMIs. Also, notices are received whereby the department is contending to levy the tax on short interest paid by the banks on premature closure of deposits. This is despite CGST having issued a clarification on June 28, 2019 that GST will not be applicable in the event of additional interest collected due to default in repayment of EMI.
As per the normal industry practice, banks levy additional interest (over and above the sanctioned rate) on the customer in case of default/ delay in payment of loan EMIs or non-compliance of conditions of the loan. Also, regarding deposits placed with the banks, the bank generally pays lower interest in case of premature closure of the deposits.
In case of loan transactions, additional interest is charged because of increase in risk for the bank due to non-payment or non-compliance of conditions. Further, in case of deposits, interest is paid at a lower rate because of reduction in tenor of the deposit.
Banks have also proposed that annual issuance of TDS certificate (Form 16A) should be allowed (as in the case of Form 16-Salary) instead of quarterly. “Since now Form 26AS has been stabilised, we suggest to discontinue issuance of Form 16A on quarterly basis,” the IBA said. The Income Tax department is currently relying on the 26AS for giving credit to the deductee and hence there is no requirement of quarterly TDS certificate.
Banks recognise an account as NPA in terms of RBI guidelines — after irregularity of 90 days. However, Rule 6EA of the Income Tax rules prescribes a period of 180 days to recognise an account as NPA. Such an anomaly gives scope for unnecessary disputes. Therefore, the timelines under Rule 6EA should be amended in line with RBI extant guidelines, IBA said.
IBA’s proposals have come at a time when the RBI has said gross NPA ratio may rise from 6.9 per cent in September 2021 to 8.1 per cent in September 2022 under the baseline scenario and 9.5 per cent under the stress scenario. Credit growth, which is now at 9.2 per cent (Y-o-Y basis), is expected to hit double digits soon.