Banks exempt from 10% TDS on one-time loan settlements, waivers: CBDT



Banks and financial institutions will not have to deduct 10% of tax deductible at source (TDS) on one-time loan settlements and exemptions, the Central Board of Direct Taxes (CBDT) said.

The CBDT clarified that the issuance of free shares and rights will not require a tax deduction under Article 194R introduced in the Union budget. Section 194R came into force on July 1, 2022 and required a 10% TDS deduction for persons providing a benefit or indirect benefit to a resident, on the value of that benefit.

Banks had raised concerns about the enforceability of the provision, saying such a tax transaction would burden them.

Clarification by the apex body of direct taxation exempts public financial instruction, scheduled banks, non-bank depository and systemically important non-depository financial companies, asset reconstruction companies, cooperative banks , the Agricultural and Rural Development Cooperative Bank, State Financial Corporation and State Industrial Investment Corporation of the provisions of the new section.

The clarification through additional guidelines is a major relief for banks, as it will save them from bearing the additional tax burden on top of the loss in the form of a haircut they face when forgoing loans, said Amit Maheshwari, tax partner at AKM Global.

It puts an end to the ambiguity on the applicability of the provisions relating to the issuance of free shares and rights. CBDT, while exempting the activity from the section, said it was stated that the issuance of free shares and rights does not provide any benefit to shareholders because the overall value and ownership of their stake does not change. .

An additional cost of acquiring the free share is considered nil for the calculation of capital gains when that share is sold, the apex direct tax body said.

The guidelines also specify that embassies and high commissions would also be exempt from Section 194R. The provisions of the section would not apply to benefits provided by an organization within the scope of the Privileges and Immunities of the United Nations Act 1947, an international organization whose income is exempt under a law of Parliament (such as the Asian Development Bank Act 1966), as per additional guidelines issued by CBDT.

In the case of a gift, such as a car, given by one business to another, the person receiving the gift may claim capital cost allowance if 10% TDS is deducted under Section 194R.

For conferences to educate dealers about a company’s products, attendee expenses will not be considered a benefit under Section 194R. If the expenses are due to concessionaires exceeding the length of stay, they would be considered a benefit and fall under the provisions of the new article. However, if the stay exceeds one day before and one day after the conference, it will not be considered as an overstay.

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