The Ministry of Corporate Affairs (MCA) addressed an important question regarding tax liability on haircuts taken by banks, financial institutions, and other creditors for companies resolved under the Insolvency and Bankruptcy Code (IBC), 2016. This clarification was provided in response to an unstarred question in the Rajya Sabha by Shri Sanjeev Arora on July 30, 2024. The response sheds light on the tax implications of such haircuts and provides clarity on the relevant provisions of the Income-tax Act, 1961.
Detailed Analysis
The Question
Shri Sanjeev Arora inquired whether companies resolved under the IBC, 2016, are liable to pay tax on the haircuts taken by banks, financial institutions, and other creditors. This question highlights the concern about the taxability of debt waivers and settlements, which are common in insolvency resolutions.
The Answer
The response was provided by the Minister of State of the Ministry of Corporate Affairs and Ministry of Road Transport and Highways, Shri Harsh Malhotra. The answer, based on information from the Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, clarified the following:
1. Taxability under Section 28(iv)
- According to clause (iv) of section 28 of the Income-tax Act, 1961, any waiver of loan amount is considered a benefit or perquisite arising from business or the exercise of a profession. This benefit, whether convertible into money or not, in cash or in kind, or partly in cash and partly in kind, is chargeable to income tax as income from profits and gains of business or profession.
2. TDS under Section 194R
- Section 194R of the Act mandates the deduction of tax at source on benefits or perquisites provided to a resident arising from business or profession at a rate of ten percent of the value or aggregate value of such benefits or perquisites.
3. CBDT Circular No. 18/2022
- The CBDT issued Circular No. 18/2022 on September 13, 2022, which clarified that one-time loan settlements or waivers of loans granted by financial institutions would not be subject to tax deduction at source under section 194R. However, the taxability of such settlements or waivers in the hands of the beneficiary remains governed by the relevant provisions of the Income-tax Act.
Implications for Companies Resolved under IBC
The clarification provided by the MCA emphasizes that while TDS may not be applicable on one-time settlements or waivers, the amount waived is still taxable as income. For companies undergoing resolution under the IBC, this means that any benefit or perquisite arising from the waiver of loan amounts will be subject to income tax. The resolution plans must, therefore, account for this tax liability to ensure compliance with the Income-tax Act.
Conclusion
The clarification by the MCA on the tax liability of haircuts taken by banks and other creditors provides critical insight into the financial implications for companies resolved under the IBC, 2016. While the waiver of loans offers significant relief to distressed companies, it also brings with it a tax obligation under the Income-tax Act, 1961. Companies and financial institutions must consider these tax implications in their resolution strategies to ensure smooth and compliant insolvency resolutions. The detailed provisions and CBDT Circular No. 18/2022 further delineate the responsibilities and exceptions, guiding stakeholders in navigating the complex landscape of tax and insolvency.
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GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
RAJYA SABHA
UNSTARRED QUESTION NO. 856
ANSWERED ON TUESDAY THE 30TH JULY, 2024
TAX LIABILITY ON HAIRCUTS
QUESTION
856. Shri Sanjeev Arora:
Will the Minister of CORPORATE AFFAIRS be pleased to state:
whether in case of companies, that are resolved as per provisions of Insolvency and Bankruptcy Code 2016, would be liable to pay tax on the haircuts taken by banks, financial institutions and other creditors?
ANSWER
MINISTER OF STATE OF THE MINISTRY OF CORPORATE AFFAIRS AND MINISTRY OF ROAD TRANSPORT AND HIGHWAYS
[HARSH MALHOTRA]
Central Board of Direct Taxes, Department of Revenue, Ministry of Finance has informed as under:
As per provisions of clause (iv) of section 28 of the Income-tax Act, 1961 (“the Act”), waiver of loan amount is in the nature of benefit or perquisite, arising from business or the exercise of a profession, whether convertible into money or not or in cash or in kind or partly in cash and partly in kind and is thus chargeable to income-tax as income from profits and gains of business or profession.
Section 194R of the Act provides for deduction of tax at source on benefit or perquisite provided to a resident arising from business or exercise of a profession at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite.
Vide CBDT Circular no 18 of 2022 (dated 13.9.2022) for removal of difficulty it has been clarified that one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with the borrowers by the Financial institutions specified therein would not be subjected to tax deduction at source under section 194R of the Act. However, taxability of such settlement/waiver in the hands of the beneficiary will continue to be governed by the relevant provisions of the Act.
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