Union Budget 2020 India: DTA is a tax benefit banks are entitled to against provisions for bad assets.
Union Budget 2020 India: Foreign banks with presence in India have requested the government to bring down the corporation tax rate for them at par with their Indian peers in the Budget, people aware of the matter said. The cut in the tax rate for Indian companies in 2019 did not apply to foreign banks who are now shelling out taxes at a significantly higher rate than domestic banks.
Tushar Suchade, partner — financial services, tax and regulatory services, said foreign banks now pay tax at a rate well over 40%, as against 30-35% paid by Indian banks. All things taken into consideration now, the effective tax rate for a company works out to 25% and if dividend distribution tax (DDT) is added to it, it works out to 31-32%. However, for foreign companies, the tax rate is almost at 42%, including surcharge.
“The logic behind that tax rate was that foreign companies do not pay a dividend distribution tax. In the earlier regime, it made sense to have a 42% tax rate because you added 7% DDT over the 35% rate. Now that the effective tax rate of Indian companies post the distribution of dividend is 31-32%, why do you want to have 42% for foreign companies?” Suchade explained.
On September 20, the government had announced its decision to lower the effective corporate tax rate to 25.17%. At that time, analysts and industry watchers had projected bank profits to rise 10-12% on an average as a result of it.
These projections are yet to crystallise as several private banks took an upfront hit in their second quarter results on account of their migration to the new tax regime. The change in the tax rate to 25% from 35% resulted in a reversal in some banks’ deferred tax assets (DTA) during the September quarter.
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DTA is a tax benefit banks are entitled to against provisions for bad assets. The writing down of past DTAs has led to a few private banks – ICICI Bank, Axis Bank, IDFC First Bank and Yes Bank – reporting losses on a post-tax basis in Q2FY20.
Meanwhile, public sector banks have been talking to the Reserve Bank of India under the aegis of the Indian Banks’ Association to allow a staggered recognition of DTA for FY20 in order to avoid taking large hits on their bottom lines, FE had reported in November.