Who's first? Tax guys or banks?

The income tax department has recommended the insertion of a clause for empowering tax authorities to get precedence over banks in recovering dues from bad loans settled by the Debt Recovery Tribunals.

According to tax sources, in the cases handled by the debt recovery tribunal, the tax authorities tend to lose a lot of dues. This is because banks are secured creditors and thus have the first right over the dues recovered by DRTs from those assets which have turned non-performing.

The I-T department has suggested that in the Income Tax Act, a clause should be inserted asserting the right of tax authorities over the dues from recovery cases. Therefore, the tax authorities could be given precedence over banks in recovering the dues.

They are of the view that while banks recover for strengthening their balance sheet, tax recovery is used for plans and programmes spelt out in the budget as part of country's fiscal objectives.

Usually banks refer the assets which turn bad to the DRT for recovery proceedings. The assets or loan given by the banks turn bad when the banks fail to recover the dues within specified time limit as per the asset classification norm prescribed the Reserve Bank of India.

Tax authorities feel that by the time a company pays the dues to the banks, there is hardly anything left to contribute to as taxes.

The recommendation is based on the fact that with increase in target for tax collection, there is an added impetus for recovery of arrears from disputed cases.

While the total arrears to be recovered from the disputed cases stand at around Rs 84,000 crore (Rs 840 billion), the feasible recovery stands at around Rs 15,000-20,000 crore (Rs 150-200 billion).

This is because, most of the arrears are stuck under stay orders of special court which could be recovered without the stay being vacated, said the source.

However, bankers are of the view that banks have a right over these dues not only by virtue of their status of being secured creditors but also the fact that they spend for the entire proceedings of the DRTs.

Therefore, it will be unfair for the tax authorities to recover these dues after they are settled by the DRTs at the behest of the banks, they said.