Corporates whose short term borrowings have turned into non-performing assets (NPAs) can still claim tax benefits even though they may not pay any interest on the amount borrowed. This will result in a massive revenue loss for the government.
In his 1996-97 budget speech, the finance minister had sought to plug this loophole, but had subsequently modified the proposal as a result of which the loophole remained unplugged.
Financial sector sources point out that the proposal was withdrawn following intense lobbying by industry.
Earlier, under section 43B of the Income Tax Act, a company could claim tax deductions on any sum actually paid as interest only on any loan or borrowing from any public financial institutions, state financial corporation or state industrial investment corporation. However, loans from banks were excluded due to which defaulting corporates claimed tax benefit on accrued expenditure without actually ever paying it.
To plug this loophole, the finance minister in his budget had proposed that for a corporate to take advantage of a tax break it must actually pay interest on any loan or borrowing from a scheduled commercial bank . The amendment was to take effect from April 1, 1997 and accordingly apply to the assessment year 1997-98 and the subsequent years.
The budget papers said, the proposed amendment seeks to include interest on any loan or borrowing from a scheduled banks also for the purpose of allowing deductions under section 43 B of the Income Tax Act on actual payment. However, the finance minister subsequently changed the proposal to state, only interest on term loans of banks will be covered by the proposed amendment of the provision of section 43 B.
Since then, there has been an insertion in section 43 B of the Income Tax Act which states actual payment needs to be made only on interest on any term loan from a scheduled bank for claiming tax deductions.
The amendment, in its present form, is of very little consequence to banks as more than 90 per cent of their corporate loans are in the form of loans, cash credit and overdrafts, which are short term in nature. Only advances beyond five years are termed as long term loans.
The loophole leads to a win win situation for defaulting corporates. In the first place, they will not have to pay the interest and principal to commercial banks and secondly, they can claim a tax benefit.
Says a banker, Had the finance minister carried through the proposed amendment in its original form, it would have acted as a deterrent for defaulting corporates.
The government, too, will lose out on three counts. First, it will lose out on potential tax revenue from the defaulting corporates.
Second, banks will claim a tax break on the provisions they make on account of the non-performing assets, which again is a revenue loss for the government.
And third, the government will not get any interest tax from the banks as the account will be classified as a non-performing asset.
