What changed
RBI observed that some UCBs were not creating DTL on Special Reserve, citing no intention to withdraw and often backing it with board resolutions. The central bank now clarifies that prudence requires DTL creation irrespective of such intent. For past shortfalls up to March 31, 2013, banks may adjust directly from reserves with disclosure; from FY 2013-14 onwards, DTL must be charged to the P&L account.
What it means for you
UCBs can no longer avoid DTL on Special Reserve by claiming non-withdrawal intent. This aligns tax accounting with AS 22 and strengthens balance sheet transparency. The full Special Reserve remains eligible for Tier-I capital computation, so capital adequacy is not adversely affected. Banks must adjust past omissions and ensure ongoing P&L charges.
What you must do
- Review your Special Reserve balance as at March 31, 2013 and compute any shortfall in DTL creation.
- Adjust the shortfall directly from reserves and disclose it in Notes to Accounts for FY 2013-14.
- From FY 2013-14 onwards, charge DTL on annual transfers to Special Reserve to the Profit and Loss account.
- Recompute Tier-I capital by including the entire Special Reserve, now that DTL is created.
Who it affects
All Primary (Urban) Co-operative Banks, Finance and accounts departments of UCBs, Auditors and compliance teams of UCBs
Can we avoid DTL if our board has passed a resolution not to withdraw from Special Reserve?
No. RBI has clarified that DTL must be created as a matter of prudence under AS 22, regardless of any board resolution or stated intent. The circular explicitly rejects that argument.
How do we handle the DTL shortfall for periods before March 31, 2013?
If the full DTL expense for the Special Reserve as at March 31, 2013 has not been charged to P&L, you may adjust the amount directly from reserves. This adjustment must be disclosed in the Notes to Accounts for FY 2013-14.
Does creating DTL reduce our Tier-I capital?
No. The circular states that banks may reckon the entire Special Reserve for Tier-I capital computation, despite the DTL creation. So capital adequacy is not negatively impacted.