The Comptroller and Auditor General (CAG) of India has flagged a potential tax implication of ₹74,766.39 crore arising from exemptions and deductions claimed by banks and non-banking financial companies (NBFCs). The report, tabled in Parliament on Thursday, highlighted persistent gaps 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 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 CAG noted.
A query emailed to the ministry of finance was not immediately answered on Thursday.
Replies furnished
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.
Not aligned
CAG also observed that Rule 6EA has not been aligned with Section 43D of the Income Tax Act, particularly after amendments brought in through the Finance Act, 2019. It identified 36 cases of NBFCs where interest on NPAs was not taxed on an accrual basis as required.
However, in a major compliance gap, the audit found 127 cases in which bad debts amounting to ₹40,178.47 crore were written off without quoting the borrowers’ PAN, and 58 cases in which ₹1,69,782.47 crore was allowed as a deduction without borrower details, even though these were not debited to the profit and loss account.
A cross-verification of data reported to regulators revealed discrepancies: 52 bank cases showing tax offered at ₹2,098.35 crore against actual recoveries of ₹14,303 crore reported to regulators. Similarly, 15 cases showed ₹137.89 crore reported as recovered to the National Housing Bank but not reflected in tax audit reports.
As part of its recommendations, the CAG suggested amendments to Rule 6EA to align it with Section 43D and RBI classifications, introduction of clearer provisions on taxation of loan settlements, and strengthening verification mechanisms for bad debt write-offs.
