In separate interviews with The Guardian, the bankers called for the harmonization of the Income Tax Act Cap 332 RE 2019 to align with the BoT’s 2014 regulations on banking institutions and (management of risky assets), in particular the interest in tax accounting on hold and on canceling loans in order to relieve the commercial banks which have been victims of contradictory laws for several years now.
The conflict in regulations turns out to be a double whammy for banks, on the one hand, banks must take losses on defaulted loans, write off those loans and create write-downs in accordance with BoT regulations.
In addition, they are forced to pay taxes on loans written off and write-downs, further damaging the profitability and capital of banks. This ultimately has a negative impact on the capital of the banking sector and therefore an obstacle to the credit growth of the economy.
Unfortunately, the legal system is quite cumbersome and loan recovery is quite delayed and after years of lawsuits, collections from banks are insignificant while banks have to bear losses up front and pay taxes on those losses.
Bankers say this scenario has a severe impact on credit growth and the cost of borrowing.
Explaining how âdepreciation charges or loan provision requirementsâ have now contradicted bank taxes due to delinquent loans by borrowers, Issa Hamisi, Deputy Director of Finance, Exim Bank (Tanzania) Limited a started by explaining how the requirements apply.
He said, âSuppose, for example, that the commercial bank recorded an annual income of 100 million / -, while its operating costs amount to 40 million / -;
This means that the bank’s profit before tax (PBT) amounts to 60 million / – of which 30 percent is taxed by the TRA as corporate tax. The 30 percent of 60mn / – is 18mn / -. Therefore, the net profit of the bank is 42mn / – â, said Hamisi adding;
BoT regulations require commercial banks to cede loan impairment charges on the loan portfolio as impairment or loan allowance to align with International Financial Reporting Standards (IFRS) and asset management at risk) Regulation 2014, that banks are required to charge these depreciation charges on loan to its profit before tax (PBT).
He said that if we assume that the total depreciation charges are calculated through the loan depreciation module, say up to one percent of total loans, adding these depreciation charges also reduces the PBT of one percent.
Crediting of loans Depreciation by banks is a mandatory requirement to align with IFRS and BOT and banks have no choice and therefore the basis for banks requiring that charges be recognized by the TRA by through the Income Tax Act 2019 as also eligible tax deductions. .
The TRA does not, however, allow these charges through its Income Tax Act as a qualifying deduction and therefore collects 30 percent corporate tax from their tax assessment from banks.
âSuppose further that the commercial bank has ceded an annual loan portfolio of 500 million / -. The one percent depreciation or loan allowance will be $ 5 million / -. If the 5mn / – are added to the previous 40mn / -, the total charges including operating costs will amount to 45mn / -.
By subtracting 45mn / – from the 100mn / – of annual turnover, the profit before tax falls to 55mn / -. Taking into account the loan impairment charges on pre-tax profit, the corporate tax of 30% of 55 mn / – could have been 16.5 mn / -, which leaves the bank with a net profit of 38 min. , 5 min / – down from the previous 42 min / -. , TRA ignores depreciation charges and collects 30% tax on a 60mn / – PBT – which keeps the tax payable at 18mn / – instead of 16.5mn / -, he explained.
Hamisi claimed that this is the point where TRAs through the income tax law enacted by parliament do not align with central bank regulations, leading banks to pay debts. billion in taxes on delinquent loans by borrowers.
Written off loans are subject to a process in accordance with the 2014 Central Bank Regulation on Banking and Financial Institutions (Risk Asset Management). According to regulation 13, the BoT stipulates that when a borrower does not repay the loan from the first day to the 90 days, he is qualitatively considered a particularly mentioned borrower and therefore subject to the special watchlist.
The regulation specifies that if a loan exceeds 90 days without being repaid, then it is subject to the category of non-performing loans which has three steps to be taken:
The number of late days from 91 to 180 is classified as sub-standard, 181 to 360 days is classified as doubtful, and 361 days or more, so the loan is considered a loss.
âAt the loss stage, the bank is required by the BoT to take aggressive remedial action for four consecutive quarters, or 360 days. Adding the first 360 days it adds up to almost 720 days and if the customer’s loan is still unpaid and the days remain unpaid beyond 720 days, then the bank is required to cancel the loan. .
It is very clear that beyond 720 days or when the loan is outstanding beyond 360 days and remains unpaid for four consecutive quarters thereafter, the BoT requires a bank to cancel the loan and if not, it is sanctioned in accordance with Regulation 35. While the Bank of Tanzania requires banks to cancel these outstanding loans, failure to comply with this requirement results in huge penalties.
The Income Tax Act states that the bank should continue to follow up with the borrower to pay off the overdue loan instead of writing it off. However, that does not identify the timeframe for doing so, âHamisi said.
At this point, Hamisi said the bankers had no choice as to which law the two regulators should obey.
Juma Kimori, chief internal auditor of NMB Bank Plc, said: âWe call for the harmonization of the TRA law with the regulations of the central bank so that we do not pay taxes which however are the result of lending in pain.
The central bank has clearly stated in its regulations the process for canceling loans, but the TRA law does not specify when to cancel. It is a long-standing problem that we seek to find a mutual solution with the two regulators, âKimori said.
Regulation 35 (1) of the Banking and Financial Institutions (Risk Asset Management) Regulations 2014 imposes penalties on commercial banks that will not cancel non-performing loans after a period of 720 days.
The regulation reads as follows: âWithout prejudice to the sanctions and actions provided for by law, the Bank may impose on any bank or financial institution one of the following sanctions in the event of non-compliance:
(a) A penalty of an amount to be determined by the Bank; (b) Prohibition on declaring or paying dividends; c) Suspension of the privilege of issuing letters of credit or guarantees; (d) Suspension of access to the Bank’s credit facilities; e) Suspension of loan and investment operations.
(f) Suspension of capital expenditure; (g) Suspension of the privilege to accept new deposits; (h) Revocation of banking authorization; (i) Suspension of the mandate of the defaulting director, officer or employee; and (j) prohibition from holding a post or function in a bank or financial institution under the supervision of the Bank.
Part (2) reads as follows: The sanction referred to in paragraph (a) of sub-regulation (1) applies to directors, officers or employees of the bank or financial institution.
Regarding loan impairment or provision issues, TRA issues guidelines on its Income Tax Law Cap 332 RE 2019 that are contrary to central bank regulations.
Section 25 (5) of the Act states that: A person may waive the right to receive an amount or write-off as a bad debt of the person-
(a) In the case of a receivable from a financial institution, after the receivable has become a bad debt as determined in accordance with the relevant standards established by the Bank of Tanzania; and that this institution has taken all reasonable steps to continue the payment and that the institution has reasonable grounds to believe that the debt will not be satisfied.
(b) In all other cases, only after the person has taken all reasonable steps to pursue payment and has reasonable grounds to believe that the right or claim will not be satisfied.
“What are the reasonable measures required by the TRA that are supposed to be taken by commercial banks apart from those stipulated in the regulations of the central bank?” Hamisi questioned.
TRA Commissioner General Alphayo Kidata recently admitted that: âI am aware of this challenge and call on the bankers to be patient as we consider a mutual way to meet it;
We intend to consult with the two parties involved in the matter which are the TRA itself, the central bank and the commercial banks. It’s a long-standing problem but since I’m new to the office I promise to start working there soon â.