Soon, banks are likely to get relief from a new tax rule that effectively mandates them to deduct a 10% tax at source on the amount of debt waived by them through one-time-settlement (OTS) or some other schemes, especially involving large accounts.
“The departments of revenue and financial services are in talks and a positive resolution of this issue is expected soon,” a senior finance ministry official told FE.
The Indian Banks’ Association has represented to both the departments of the finance ministry that the loan amount waived by banks via OTS doesn’t amount to earnings by or business benefits granted to the borrowers, the official said. Instead, it’s a settlement with the borrowers, as they no longer have the ability to repay the entire loan amount.
According to the section 194R of the Income Tax Act, introduced in the Budget for FY23, any person providing to a resident any benefit or perquisite (whether convertible into money or not) arising from business or the exercise of a profession, by such resident, will ensure that tax has been deducted in respect of such benefit or perquisite at the rate of 10% of the value of such benefit or perquisite. The rules, tied to some riders, came into force from July 1.
No tax, however, will be deducted if the aggregate value of perquisite/benefit to a resident doesn’t cross Rs 20,000 in a fiscal. Moreover, the provision won’t apply to a business whose total annual turnover doesn’t exceed Rs1 crore; the limit is50 lakh in case of a professional. This means all large cases of loan waivers could be covered by the rule unless the revenue department either relaxes the provision or brings in clarification to exclude such write-offs, say bankers.
“This will effectively mean that banks will be required to pay the TDS upfront on the loan amount waived and then possibly recover it from the borrower, who would be in no position to pay any extra amount. So ultimately, banks will have to take the hit,” a top public-sector banker said. For example, if a lender waived Rs 4 crore in loan to a borrower, it has to deduct Rs 40 lakh (at the rate of 10%) as the TDS.
The loans waived or written off by banks was about Rs 1.57 trillion in FY22 and Rs 2.03 trillion in the previous year. In all, banks have written off debt worth Rs 9.92 trillion over five years through FY22, minister of state for finance Bhagwat Karad said in a written reply in the Rajya Sabha recently.