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FIs claim back tax benefit: over Rs 10 billion hit for corporates

K Ram Kumar

India Inc is set to take a hit of over Rs 10 billion, thanks to the insertion of a new section-Section 14(A)-in the Finance Bill, 2001.

The move, which is with retrospective effect from assessment years 1962-63, will deny financial institutions and banks the tax benefit on their exposure to infrastructure projects. But, the main loser will be the corporates which have availed of the loans as FIs and banks which have so far been passing on the tax benefit to the borrowers will now claim them back.

A tax expert said the actual amount could be much more than Rs 10 billion. "It is extremely difficult to quantify the amount as it goes back to the assessment year 1962-63. It will certainly be much more than Rs 10 billion as the core sector projects are massive in size. The FIs have the maximum exposure in these projects since the banks are a relatively new player," he pointed out.

The cost of the core sector project is set to escalate roughly by around three percentage point per annum as a direct fallout of the insertion of a new section-Section 14 (A)-in the Finance Bill, 2001.

The new section says, "No deduction shall be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Income-Tax Act". In effect, banks and FIs will now be allowed to get the tax benefit only on the net income and not the gross income.

For instance, if an FI offers a core sector loan at 12 per cent and its cost of funds is 10 per cent, it will be able to claim the tax benefit only on two per cent and not the entire 12 per cent which most of the FIs have been doing so far.

"The tax benefit has now come down to 20-50 basis points and therefore there is hardly incentive left with banks and FIs to pass it on to the corporates," said an industry source.

A Rs 10-billion core sector project with a gestation period of four years will witness a cost escalation by Rs 1.2 billion and the banks and FIs which hitherto used to charge concessional interest of about 12 per cent will now increase it to 15 per cent.

"The borrowing cost of corporates will rise as all agreements between them and the FIs have a clause stipulating that a lower interest rate will be charged only as long as they (FIs) enjoy the benefits under this section," said an expert.

"Application of this clause, that too with retrospective effect, is sure to jack up the costs of borrowers who are undertaking projects in the core sector as the FIs will be constrained to pass on the exemption benefits enjoyed by them under Section 10 (23) G of the Income-Tax Act," sources said.

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