New Delhi: The Comptroller and Auditor General of India (CAG) has warned of potential tax implications ₹74,766.39 crore coming from exemptions and deductions claimed by banks and non-banking finance companies (NBFCs). A report tabled in Parliament on Thursday highlighted persistent weaknesses in compliance, reporting and internal controls.
The report did not name any specific bank or NBFC but noted that it covered 17 entities, including 10 scheduled commercial banks and seven NBFCs.
The performance audit conducted by the CAG on the Income Tax department reviewed both the follow-up to the earlier findings of the 2008 audit and compliance with Reserve Bank of India (RBI) norms on asset classification, revenue recognition and provisioning.
It included an assessment of scheduled commercial banks and NBFCs and examined 2,378 cases out of a sample of 2,463 selected up to June 2023. The report contains 1,847 audit observations, including 671 systemic issues, 118 related party observations, 525 internal control deficiencies and 533 compliance issues. From the total probable tax effect ₹74,766.39 crore is only related to compliance issues.
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The report states that the overall recovery from ₹3,503.44 crore has already been disbursed from the five assessees, reflecting partial acceptance of audit findings by the department.
According to the conclusions of the report, the Ministry of Finance responded to 25 comments related to compliance with regulations ₹1,061.58 crore, accepting 21 cases worth ₹799.38 crore and partly accepts two cases involving ₹24.50 million crowns.
Corrective actions were completed in 17 cases ₹599.04 crore and initiated in six cases ₹224.84 crore, while the two observations include ₹237.70 crore was not received, the CAG observed.
An emailed query to the Treasury Department was not immediately returned Thursday.
Answers furnished
At field level, the department provided responses to 212 observations involving ₹47,557.33 million crowns. Of these, 88 observations involving ₹28,639.13 million crowns were received. Corrective actions were completed in 79 cases ₹5,056.59 crore and initiated in 64 cases ₹15,324.15 crore while 41 observations include ₹6,900.25 million crowns were not received.
The audit identified recurring problems with allowances, which mainly related to bad debt write-offs, allowances for bad and doubtful debts and transfers to special reserves. These represented the likely tax consequences ₹33,459.08 million crowns, ₹2,971.26 million and ₹531.18 million, or
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The CAG noted that similar issues had been flagged earlier, following which the Central Board of Direct Taxes (CBDT) had issued guidelines in November 2008.
It also highlighted regulatory discrepancies, noting that Rule 6EA of the Income Tax Rules defines a non-performing asset (NPA) as an asset overdue for more than six months, while the Reserve Bank of India classifies NPAs after three months. This difference has led to disputes over the taxation of accrued interest for the interim period.
Not aligned
The CAG also observed that Rule 6EA was not in compliance with Section 43D of the Income Tax Act, especially after the amendments made through the Finance Act, 2019. It found 36 cases of NBFCs where interest on NPAs was not taxed on accrual basis as required.
However, for a large gap in compliance, the audit found 127 cases where bad debts were higher ₹40,178.47 crores were written off without mentioning the PAN of borrowers and 58 cases where ₹1,69,782.47 crore was allowed as deduction without details of the borrower even though the same was not debited to the profit and loss account.
A cross-check of data reported to regulators revealed irregularities: 52 bank cases show a tax offered on ₹2,098.35 crore against the actual amounts recovered ₹14,303 million crowns were reported to the regulators. 15 cases turned out similarly ₹137.89 crore reported as refunded to National Housing Bank but not reflected in tax audit reports.
As part of its recommendations, the CAG proposed changes to Rule 6EA to bring it in line with Section 43D and RBI’s classification, introducing clearer provisions on taxation of loan settlements and strengthening verification mechanisms for bad debt write-offs.
