Banks seek tax law change to deal with pension accounting

Banks seek tax law change to deal with pension accounting
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First Published: Fri, Feb 08 2008. 11 04 PM IST
Updated: Fri, Feb 08 2008. 11 04 PM IST
Mumbai: The banking industry is seeking changes in the tax laws to prepare itself for a new accounting norm which mandates that all Indian companies must calculate the retirement benefits of their employees, such as pension, gratuity, provident funds and leave encashment benefits, in accordance with international practices.
Banks want an amendment in the income norms to allow employers to make a higher contribution to the gratuity fund. Under the current norms, they cannot contribute more than 8.33% of their salary to the gratuity fund.
The pre-budget memorandum of the industry, submitted by the Indian Banks Association (IBA), the banking industry lobby, to finance ministry, says “many employers are finding themselves in a situation where they will need to contribute large amounts to meet requirements of the new standards.”
The new norm, known as Accounting Standard 15 (AS-15) and notified in December 2006, was to come into effect from the fiscal year beginning 1 April 2007. However, strong lobbying by different quarters has been able to delay it by one year.
People familiar with the development said the burden on the public sector banking industry on account of the new norm could be as much as Rs16,000 crore. This stems from a difference in the assumptions that the banks have made while calculating the retirement benefits of their employees and the norms that the Institute of Chartered Accountants of India (Icai) wants them to follow.
Every year, each of these banks provide money to cover the retirement benefits of their employees, calculating their basic pay, dearness allowance, past service and years left to retire as well as the mortality rates.
The calculation, done by actuaries, varies from bank to bank.
The new Icai-backed norms have standardized these assumptions, and mandate that banks and corporations must calculate the last salary that will be drawn by an employee and provide for pension and gratuity liability on that basis.
“The budget memorandum proposes the amendment to the income-tax rules to facilitate compliance with AS-15. The current provisions provide administrative hassles while accounting,” said a senior banker with a public sector bank, who did not want to be identified.
Banks also want the finance ministry to restore a facility that had earlier enabled them tax-free interest on long-term lending towards infrastructure projects. Banks charge interest on loans given to borrowers and pay tax on this interest income. However, until recently, they were not required to pay tax on interest earned on infrastructure lendings.
According to a study undertaken by industry body, the Associated Chambers of Commerce and Industry of India, or Assocham, Bank Credit to the Infrastructure Sector for 2000-2007, credit disbursement by banks has been highest in the power sector at the rate of 58%, followed by roads and ports at the rate of 46%.
Credit allocation to the telecommunication sector has grown at the rate of 34.4% during the six-year period analysed by the study that covered iron and steel, construction, petroleum, power, telecommunication, roads and ports.
The banking industry also seeks changes in the income- tax law for provisioning of bad or doubtful assets. Banks are required to provide for their stressed assets. The quantum of provision varies between 10% and 100%, depending on the age and quality of the stressed assets. Banks earn some tax benefits on such provisions.
However, the IBA memorandum to the finance ministry says the interpretation of the tax laws on provisions vary between the Reserve Bank of India (RBI) and the income tax authorities, and banks should be allowed to stick to RBI’s provisioning norms.
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First Published: Fri, Feb 08 2008. 11 04 PM IST