CAG flags tax implications of ₹74,766 crore from exemptions, deductions claimed by banks, NBFCs
New Delhi, July 3: The Comptroller and Auditor General (CAG) has highlighted a potential tax implication to the tune of ₹74,766.39 crore arising from exemptions and deductions claimed by banks and non-banking financial companies (NBFCs).
In a report tabled in Parliament, the government’s statutory auditor flagged persistent gaps in compliance, reporting and internal controls.
It said it covered 17 entities, including 10 scheduled commercial banks and seven NBFCs, but did not name any one of them.
The performance audit, conducted by the CAG on the Income Tax Department, reviewed both follow-up actions on earlier findings from the 2008 audit and compliance with Reserve Bank of India (RBI) norms on asset classification, income recognition and provisioning.
It covered assessments of scheduled commercial banks and NBFCs, examining 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-related issues. Of the total probable tax effect, ₹74,766.39 crore pertains to compliance issues alone.
The report noted that an aggregate recovery of ₹3,503.44 crore has already been made from five assessees, reflecting partial acceptance of audit findings by the department.
As per the findings of the report, the finance ministry responded to 25 compliance-related observations involving ₹1,061.58 crore, accepting 21 cases worth ₹799.38 crore and partly accepting two cases involving ₹24.50 crore.
Remedial action has been completed in 17 cases involving ₹599.04 crore and initiated in six cases involving ₹224.84 crore, while two observations involving ₹237.70 crore were not accepted, the government auditor said.
At the field level, the department furnished replies in 212 observations involving ₹47,557.33 crore.
Of these, 88 observations involving ₹28,639.13 crore were accepted.
Remedial action has been completed in 79 cases involving ₹5,056.59 crore and initiated in 64 cases involving ₹15,324.15 crore, while 41 observations involving ₹6,900.25 crore were not accepted.
The audit identified recurring issues in the allowance of deductions, particularly relating to bad debts written off, provisions for bad and doubtful debts, and transfers to special reserves.
These accounted for probable tax implications of ₹33,459.08 crore, ₹2,971.26 crore and ₹531.18 crore, respectively.
The CAG noted that similar issues had been flagged earlier, following which the Central Board of Direct Taxes (CBDT) had issued instructions in November 2008.
It also flagged regulatory inconsistencies, noting that Rule 6EA of the Income Tax Rules defines a non-performing asset (NPA) as one overdue for more than six months, whereas the Reserve Bank of India classifies NPAs after three months. This divergence has led to disputes on the taxation of accrued interest for the intervening period. (BVI)
