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Banks and manufacturing companies look at significant deferred tax asset hit on financials


Mumbai: The uncertainty around future taxable profits because of the Covid-19 virus outbreak may lead to write downs or impairments of tax assets at some top banks, non-banks and manufacturing companies.

In the April-June quarter, several companies may be impacted because they are unable to set off deferred tax assets against payable taxes, industry trackers said.

Deferred tax assets are set-off against future projected profits every year.

These tax assets – which sit on the asset side of the balance sheet — are essentially used to reduce tax payable in future.

For some large corporates, the deferred tax amount is substantial.

“Deferred tax assets, which are as high as hundreds of crores for some companies, could see major hit this quarter as there may be an issue to demonstrate sustainable profits against which they can be adjusted,” said GirishVanvari, founder of Transaction Square, tax advisory firm.

“For certain sectors, there may also be a going concern issue and they may even have to take impairment on these tax assets,” he added.

A going concern qualification is basically an opinion given by statutory auditors on whether the business has the resources to survive for at least one year.

In case company auditors think that the Covid-19 pandemic has put a question mark on the business model or fundamentals of a company, they would have to point that out in its audited results, industry trackers said.

Many sectors may see auditors take a hard stance on listing going concern qualifications due to the Covid-19 situation, audit experts said.

Some sectors that will face a major business impact include aviation, food and beverages, real estate and tourism.

“Many companies, including banking companies, will now find it difficult to make projections of future taxable profits, thereby limiting their ability to recover the deferred tax assets, as originally planned. Several sectors including aviation, F&B, tourism, auto may see an immediate impact on their balance sheets,” said Yogesh Sharma, deputy managing partner, BDO India.

Many companies may have to write off these tax assets completely or partially due to the time limit that is attached to these assets, auditors said.

If the government gives tax relief on certain types of income, then companies may be able to carry forward some of the tax assets.


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