Fearing sharp fall in earnings and capital, most PSBs said ‘no’ to lower corporate taxes in FY20

The Centre’s move last year to slash corporate tax rate has not offered any relief to public sector banks. Weak core performance and the one-time charge owing to re-assessment of deferred tax assets (DTA), has, in fact, dissuaded most PSBs from shifting to the lower new tax regime.

Data compiled from annual reports and results reveal that barring SBI and Indian Bank, other state-owned banks have opted to stick with the old tax structure in FY20. Among the leading private banks, HDFC Bank, Axis Bank and ICICI Bankdecided to move to the lower tax rate.

Lower tax rate of 22%

In September last year, the Centre had inserted a new section 115BAA in the IT Act through an ordinance that provided all domestic companies an option to move to a lower tax rate of 22 per cent (effective 25.17 per cent) from FY20 (provided they do not avail specific exemptions or incentives). The earlier applicable tax rate is 30 per cent (effective 34.94 per cent).

But most public sector banks have not opted to move to the lower tax regime, which was intended to lower their tax outgo. While poor earnings performance (huge losses in most cases) of PSBs over the past few years wanes the relief under the lower tax regime in any case, it appears that the sharp write-down in deferred tax assets has discouraged these banks further from taking the bait.

DTA conundrum

Aside from lowering the tax outgo, moving to the lower corporate tax rate has another key impact on banks having large bad loans. This is because while banks provide for bad/stressed loans, for taxation purposes, under the Income-Tax Act, the provisions allowed may be lower. Among other reasons, this mismatch also leads to creation of deferred tax assets. Hence, banks moving to the new tax rate regime have to re-assess the DTA based on the lower tax rate. This could lead to sharp write-downs impacting profits. For instance, SBI, which opted to move to the lower tax rate in FY20, took a one-time charge of ₹3,392 crore owing to re-assessment of its DTA. Indian Bank saw a lower write-down in DTA of ₹142 crore charged to the P&L account during FY20.

In the case of private banks such as Axis Bank and ICICI Bank, there was a one-time steep write-down in DTA of ₹2,138 crore and ₹2,919 crore, respectively, in the September 2019 quarter, which had impacted their earnings.

Other PSBs (excluding SBI and Indian Bank) have avoided such sharp write-down in their DTA by sticking to the old tax rate. The DTA figures as disclosed in the FY19 annual report for these bankssuggest that a move to lower tax rate could have resulted in ₹1,000 crore to ₹2,000 crore of sharp write-downs in FY20.

While it is true that the re-assessment of DTA is a one-time charge and, in effect, an accounting entry, the impact on headline profit and capital ratios could be a concern for banks already reporting weak earnings.

Poor earnings; little benefit

As such, the benefit of moving to a lower tax rate (lower tax outgo) may not be much to offset the negative impact of DTA write-down. Over the past three fiscals, the earnings of most PSBs have been abysmal, owing to weak credit growth and rise in bad loans. Excluding SBI, the aggregate earnings picture for PSBs has been dismal, reporting losses in the past three years. In FY20, while a few public sector banks’ earnings moved into the black, they were still meagre.

Weak profits, coupled with sharp-write down in DTA, could have weakened the earnings picture further for these banks.