Section 43B change to hit CDR firms

Steel firms will be the worst hit.

The positive ring sounded by the Union Budget for the steel industry has mellowed down a day later with the proposed amendment in section 43B of the Financial Bill (which deals with deferred interest payment).

Accordingly, the guidelines on corporate debt restructuring (CDR) mechanism would be modified. There are around 120 companies registered under the CDR package, working their way out of the red and now they will have to cough up more money to get back in the black. The steel industry, which has the highest debt under CDR, is likely to be the worst hit.

About Rs 64,258 crore worth debt is being reworked under CDR. Iron and steel industry accounts for 40 per cent of this. From this sector, 15 companies are under the CDR programme with debts amounting to Rs 28,373 crore.

"Earlier, instead of paying the interest overdue on loans, the companies used to convert it into another term loan, which could be used for tax purposes while computing income. But now, unless they actually pay the interest, the companies can't avail of it to use for tax purposes," said an official from a prominent accounting firm.

"In other words, with the amendment, the taxable income will go up and tax outflow from the company will increase. The constructive payment of the loans will be no longer permissible," said Seshagiri Rao, director, finance, JSW Steel.

To make matters worse, the amendment has brought in the 'retrospective effect' clause from 1989 in case of loan and borrowing, and from 1997 for loans and advances.

"This is a ridiculous and uncompassionate step. It means that companies will have to open up assessments already done and cough up much more money," said sources.

This couldn't have been worse for companies which were almost out of the red. Now they have to shell out more money to come out of CDR purview.

Interestingly though, most of the steel companies have put up a brave face on the amendment to section 43B. Essar Steel official, when contacted, said the company was already functioning under the new system and '' is not affected."

But he added that with the retrospective effect clause put into place, the company "may pay the taxes but not the interest."