Vijay Kelkar task force proposed amendments in Income Tax legislations to provide a major relief to banks and financial institutions for shoring up their profits even after providing for non-performing assets now at over Rs 1,10,000 crore (Rs 1,100 billion).
In its final report submitted to Finance Minister Jaswant Singh, the task force mooted amendment in the provisions of Section 36(1)(viia) of Income Tax, which exempt banks and financial institutions from paying taxes on the amount of profit that is written off for NPAs.
"RBI mandates banks and FIs for provisioning of NPAs. However, for tax purposes, this statutory obligation is disregarded even though under general expense rule, statutory liability is a fully allowable deduction," the panel noted.
As a result, the Kelkar panel said, "Banks and FIs face a double jeopardy -- they have to statutorily provide for such NPAs thereby undermining actual profits as well as pay tax on such provisioning, which further undermines the profits."
In his briefing, the advisor to Finance Minister said the proposed amendment in Income Tax Act would enable banks and FIs to improve their profits significantly.
The panel also said deduction for delayed payment of statutory liability relating to labour should be allowed in the year of payment like delayed taxes and interest.
"Complete disallowance of such (labour) payments is too harsh a punishment," it said. Currently, deduction for payment of labour related liabilities are disallowed in contrast to delayed liabilities of interest and tax as envisaged under Section 43B of the Income Tax Act.