The IBA has asked the government to reform tax laws affecting the banking industry. In a pre-budget memorandum addressed to the finance ministry, the association has stressed the need to undertake these reforms and provide relief to banks, sources said.
The IBA memorandum has drawn the finance ministrys attention to the Narasimham Committee report of 1991 which said that there should be little divergence between book profits and taxable profits. It has also recommended that there should be appropriate incentives in tax laws to induce banks and financial institutions to adopt desirable accounting practices.
A major problem faced by banks in tax matters relates to the provision for bad and doubtful debts. Banks no longer have a choice regarding the amount to be so provided because it is the RBI that directs them in this matter. It is therefore common that the actual amount to be provided is far more than what the income tax rules permit, said the IBA memorandum. It is therefore necessary to amend tax laws, it added.
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Another complaint of banks relates to the depreciation that banks have to provide in value of their investments. In case of untraded securities, the RBI determines the yield to maturity (YTM) at the end of the fiscal year. Banks, however, often find that the assessing officers disallow the amount so provided because this method of YTM is not recognised by tax rules.
As regards interest tax, the IBA memorandum has pointed out that interest on investment in securities was exempted from tax from assessment year 1996-97. However, the tax had been introduced from October 1991, and hence there is a need to exempt interest on securities for assessment years 1992-93 to 1995-96 as well. There is also a dispute between banks and tax authorities on the method of accounting.
While the cash basis and mercantile methods have been recognised by tax laws, the hybrid method followed by banks has not been allowed.
This creates problems for banks because there are variables like commission on bank guarantees which cannot be accurately estimated.
by banks and they therefore cannot adopt the mercantile method of accounting. This is also true for items like brokerage and locker rents. It is therefore necessary to reform tax laws to permit the hybrid system of accounting, said the IBA memorandum.
Rules regarding tax deducted at source (TDS) have led to bifurcation of large deposits, with the result that the number of deposit accounts in the banking system has jumped to more than 38 crore.
Even as this implies a big burden on banks, it also defeats the purpose of TDS, as small deposits would be exempt from it, the IBA pointed out.