RBI-guided bank M&As to get tax breaks

NEW DELHI/MUMBAI: Amalgamations in the banking sector carried out under a scheme prepared by the banking regulator — such as the one involving Oriental Bank of Commerce and Global Trust Bank — are all set to be eligible for tax breaks now.

The Central Board of Direct Taxes has agreed to carry out necessary amendments in the Income Tax Act. These changes have been provided for banks, which take over another bank under special conditions — where a moratorium is declared on the operations of a bank and a scheme for merger is sanctioned by the government.

Changes are also set to be made for extending tax breaks available under Section 72 (A) of the Income Tax Act to a bank taking over a financial institution. This will help the government push through, for instance, the merger of the troubled financial institution IFCI with a bank.

Right now, amalgamations in the banking sector that are “voluntary� by nature qualify for the tax breaks under Section 72 (A) of Income Tax Act. The tax break is in the form of a set-off of the carry forward losses of the amalgamating company with the profits of the amalgamated company.

The I-T Act will be amended to ease some of the conditions imposed for getting the tax break. One of the main conditions now is that three-fourths of the shareholders in the amalgamating company should also become shareholders in the amalgamated company.

The OBC-GTB amalgamation scheme, however, does not conform to this condition. OBC has, therefore, not got the tax benefit yet. The amendments in the act are likely to be with retrospective effect to enable OBC to get the tax benefit.

The OBC management had earlier said that it could gain over Rs 300 crore if the tax benefit was extended to the bank for taking over GTB. Similarly, Punjab National Bank will also gain if the proposed amendments are carried out this time. The bank took over the Kerala-based Nedungadi Bank through a similar scheme of amalgamation, prepared by the RBI in accordance with the provisions of the Banking Regulation Act. PNB reckons that it could take a hit of close to Rs 40 crore if the tax breaks are not granted to it.

The RBI is empowered, under Section 45 of the Banking Regulation Act, to order a moratorium on operations of a bank to protect the interests of depositors.