Rift between the Federal Board of Revenue (FBR) and the banking sector to determine the rate of non-performing loans (NPLs) as bad debts is causing delay in the amendment to 'The Seventh Schedule', which would be announced in the coming budget speech 2009-10, scheduled on June 13. "No body knows, what would be the final amendments in the schedule," sources told Business Recorder on Thursday.
They said the board had already proposed to the ministry of finance that bad debts should be one percent of the annual income declared by the financial institutions in their income tax statements. They said that banks were reluctant to accept the proposal because they were used to conceal their taxable incomes by deducting 3 per cent as bad debts to minimise the payable income tax.
They, however, said the financial sector has urged the government to fix 5 percent as the rate of bad debts on loans sanctioned in the whole fiscal year. They expressed apprehension over the issue, saying that, "if the government approved the demand of the bankers, the revenue collection would considerably decline." To a question, they said that Dr Hafeez Pasha, who is presiding over the budget committee, has approved the proposal as it is followed in Bangladesh that one percent of sanctioned loans should be considered as bad debts.
They added the proposal has been rejected by Shaukat Tarin, advisor to the premier on finance, he is of the view that the rate of bad debts could not be determined until analysing the claims submitted by the banks. Therefore, the meetings are being held with the prudential regulators but all efforts in this regard remain meaningless, they observed.
They said that the Indian authorities deducted around 5 percent of the total income as bad debts while Sri Lanka was computing it as one percent of the total sanctioned loans. They said the provisions for classified advances and off balance sheet items were earlier allowed as claimed in the accounts, provided a certificate from the external auditors is furnished by the banking company to the effect that such provisions were in line with the requirements of the prudential regulations.
However, the provisions in this regard had been amended last fiscal year and now advances and off balance items are allowed in accordance with the provisions of section 29 and 29A. According to section 29, money lent by a financial institution in determining income from business chargeable to tax; the debt or part of the debt is written off in the accounts of the person in the tax year; and there are reasonable grounds for believing that the debt is irrecoverable.
The amount of the deduction allowed to a person under this section for a tax year shall not exceed the amount of the debt written off in the accounts of the person in the tax year. Where a person has been allowed a deduction in a tax year for a bad debt and in a subsequent tax year the person receives in cash or kind any amount in respect of that debt and the following rules shall apply, namely:-
Where the amount received exceeds the difference between the whole of such bad debt and the amount previously allowed as a deduction under this section, the excess shall be included in the person's income under the head "Income from Business" for the tax year in which it was received; or
Where the amount received is less than the difference between the whole of such bad debt and the amount allowed as a deduction under this section, the shortfall shall be allowed as a bad debt deduction in computing the person's income under the head "Income from Business" for the tax year in which it was received.
While, Section 29 allows banking company or non-banking finance company or the House Building Finance Corporation to deduct three per cent of the income for the tax year, arising out of consumer loans for creation of a reserve to off-set bad debts arising out of such loans. Where bad debt an not be wholly set off against reserve, any amount of bad debt, exceeding the reserves shall be carried forward for adjustment against the reserve for the following years.