Tax outgo of merged state-run banks, general insurers to see substantial fall

Mumbai: The Union budget has allowed carry forward of losses and depreciation for state-run banks and general insurance companies that are being merged, a move that would substantially reduce tax outgo of recently merged state banks.Banks are allowed to carry forward depreciation and net loss in their books for up to eight years, and use them to offset their future profits and pay lower tax. However, as per the current regulations, in the event of a merger they cannot take either depreciation or loss on the books of the merged entity, experts said.Such carry forwards are allowed for firms governed under the Companies Act, but not for banks that are regulated under the Banking Regulation Act, they said.The new budget proposal will change that.“Loss carry overs need to be enabled with the appropriate provisions in the context of mergers, and this proposal He said the move to allow loss carry overs was “very much expected”. “Absent this, the mergers would not have harnessed the full fiscal benefits,” Gupta said.While this is mainly an accounting entry, not allowing carry forward in mergers could pose huge tax burden for PSU banks and insurance companies as many of the entities being merged have substantial depreciation and losses in their books.For instance, if Bank A, which makes a profit of Rs 100 crore, is merged with Bank B that has a net loss of ?50 crore, then as per existing regulations the merged entity needs to pay tax on Rs 100 crore profit. However, once the new provision comes into effect, the new merged entity will have to pay tax only on Rs 50 crore of profit as the loss of Bank B would be absorbed.The amendment will come into effect from assessment year 2020-21.In August last year, the finance ministry had announced merger of 10 public sector banks — many with substantial losses — into four.“Most banks which were under the Reserve Bank’s prompt corrective action framework had accumulated losses,” CEO of a publicsector entity said on condition of anonymity. “This move will help create substantial tax savings for merged banks, which can be pumped into the economy.”Merged PSU Banks, General Insurers Can Carry Over LossesOriental Bank of Commerce and United Bank of India were merged with Punjab National Bank. Now, PNB had posted losses of Rs 9,975 crore for 2018-19 while UBI had losses of Rs 2,316 crore. OBC had closed the year with marginal profits.In another pairing Syndicate Bank was merged with Canara Bank, with the latter posting Rs 2,588-crore losses for FY19.Andhra Bank and Corporation Bank were merged with Union Bank of India. Corporation Bank had reported losses of Rs 6,332 crore for FY19 while Andhra Bank reported losses of Rs 2,786 crore.Allahabad Bank was merged with Indian Bank that recorded Rs 8,333 crore losses for the last fiscal. Depreciation claimed by several banks on certain capital expenditure allows them to report net losses.

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