Clear hurdles for mergers, give equal tax treatment, say banks

RUN UP TO BUDGET 2006

The banking industry wants the government to clear legal hurdles for its consolidation by permitting voluntary mergers and removing the difference in tax treatment for private and nationalised banks.

The Indian Banking Association (IBA) is likely to meet Finance Minster P Chidambaram shortly to present its set of pre-Budget demands. Besides asking for facilitating consolidation, the industry will pitch for tax concessions for asset reconstruction companies (ARCs) on the lines of incentives available to mutual funds.

The industry wants the benefit of carry-forward and setting off of accumulated losses to be extended to private banks and not just to nationalised banks as consolidation and the pace of mergers are expected to increase in the sector.

While the government wants to play the facilitator's role in the consolidation process, voluntary mergers in the banking industry cannot take place as the Banking regulation Act, 1949 provides for amalgamation or reconstitution of banks for which the Reserve Bank of India has passed an order of moratorium (this happens when a bank is distressed).

Bankers also want deduction for expenses incurred on raising capital through public issues in light of the need to raise capital in step with BASEL II norms. "Since the exemption is available to companies, it should be extended to banks and non-banking finance companies," an IBA official said.

To encourage deposits, the industry wants the government to include bank deposits with 3-5 years' tenure under the Rs 1,00,000 tax saving umbrella available to tax payers for deductions. "Banks are finding it tough to attract deposits despite hiking their deposit rates. The tax incentive will help mobilise deposits," an executive with a private sector bank said.

Demanding complete tax exemptions for trusts set up by the ARCs on the lines of mutual funds, bankers also want exemption from TDS as incomes of trusts will be passed on to holders of security receipts through an increase in net asset value or dividends, similar to mutual funds. The trusts set up by the ARCs buy loans from banks and issue security receipts as a consideration.

Banks want consistency in provision related to tax treatment of NPAs by allowing full provisions to be allowed as deductions in the year of provisioning.

On fringe benefit tax (FBT), the industry wants it to be withdrawn for office expenses and the earlier perquisite rules restored in step with international practices in countries like Australia.

The industry also wants contributions made by banks on their approved pension funds to be exempted from the FBT, as they are statutory in nature and the pension received in the hands of the retiree is taxable.