tds: banks to move government on TDS on loan waivers
Loan tranches forfeited to reduce pressure on defaulting borrowers are interpreted as “benefits” that lenders pass on to borrowers under new withholding tax (TDS) provisions the government has released.
Even if there is no cash transfer from the bank to the borrower, the extent of the discounts taken by the lenders is imputed as “income” for the borrower.
For example, if a bank reduces the loan outstanding from ₹100 crore to ₹40 crore because the borrower is unable to repay or arrange periodic interest expenses, the bank will have to pay a 10% TDS of 6 ₹ crore on the ₹60 crore which is deducted from the total loan amount.
“This would place an additional burden on banks during loan restructuring. We believe that this particular provision of the TDS has been inserted without adequate consultation and understanding of the consequences. This is a strange situation where the bank has to make a sacrifice in reason for the waiver because as well as arranging for TDS. We have decided to pursue the matter with the government,” a senior banker told ET.
The tax implication was highlighted by a banker at a recent meeting, following which the industry body, Indian Banks’ Association, decided at its steering committee meeting to send a representation to the government.
Multiple transactions are included in the TDS provisions as it is the easiest way to widen the tax net, as the payer is held responsible for the deduction and suffers the consequences of not deducting.
According to Senior Accountant Dilip Lakhani, “The scope of TDS appears to have been expanded. there is a settlement of the loan with the borrower and a certain amount is amortized in the process. However, the bankers’ fear probably stems from the word ‘profit’ in the new circular on TDS.”
“Courts have held that if a borrower has borrowed funds specifically for the acquisition of plant or machinery or land or a building for a project, then the liability forgiveness is not taxable. D On the other hand, the circular deals with cases where the benefit is taxed as income, so if a bank levies the tax, the question of extending credit to the borrower will also be moot if the said amount is not is not taxable,” Lakhani said.
Lakhani and other tax experts believe that the Central Board of Direct Taxes, the top arm of the Ministry of Finance, should dispel the fog over the TDS resulting from waivers and loan sacrifices – particularly because economic stress may necessitate a significant amount of loan restructuring and settlement by banks.
The government should also consider investing more resources and manpower to quickly process applications for less or no withholding certificates, said Ashish Mehta, a partner at law firm Khaitan & Company. “Since in case of settlement of loans, the banks will pay the TDS with the money of the borrowers, the borrowers have to go to the tax department to apply. This will ease the burden in cases where the parties are facing real difficulties. And there will be additional complication for the banks if there is not enough money in the accounts of the borrowers, and the banks are required to request funds from the borrower,” said Mehta.