The Centre has allowed banks to declare dividend by exempting them from the provisions of Sub-section (1) of Section 15 of the Banking Regulation Act, 1949. This section prohibits banks from declaring dividend if they create deferred tax assets.
Provisioning against sticky assets is an example of a deferred tax asset. Though a bank provides for the non-performing asset, it is not allowed the benefit of tax deduction.
Only if the asset is completely written-off does the bank stand to gain from the resulting tax deduction. Some of the banks had declared dividends in financial years 2001-02 and 2002-03 despite having creating deferred tax assets.
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The government has declared that the provisions of Sub-section (1) of Section 15 of the Banking Regulation Act, 1949 shall not apply to the banks as treatment of the deferred tax assets arising on compliance with Accounting Standard 22 issued by the Institute of Chartered Accountants of India, being treated as expenditure, is not represented by tangible assets.
The Centre, on the recommendation of the Reserve Bank of India, has exercised the powers conferred by Section 53 of the Banking Regulation Act, 1949 (10 of 1949) and issued a notification.
Two types on intangible assets have been created in the banking system. The one arising out of voluntary retirement scheme is termed as the deferred tax expenditure and the one on account of provisioning against sticky assets is the deferred tax asset.