HAVE finance minister P Chidambaram's dreams of tax extraction from the corporate sector come to naught? If the results of some of the bluechip companies are studied, the answer is yes.
In a landmark year where the finance minister had ordained in crystal-clear terms that if a company makes a profit, it will have to pay a minimum alternate tax (MAT) of 12 per cent--irrespective of its status--a whole host of companies scattered across myriad industries and spread all over the country are one step ahead. A sample:
Outlook asked just that. The cryptic reply: tax provision for the current year has been made after taking into consideration benefits admissible under the provision of the Income Tax Act, 1961.
The issue of tax avoidance assumes importance due to two reasons. One, FY 1997 was a year where the finance minister had apparently left no ambiguities in the law. If you make a profit, you pay taxes. So, how have all these companies got away?
Two, had these companies paid the MAT of 12 per cent and the surcharge on it, their tax liability would have been higher In the case of Reliance, it would have been close to Rs 175 crore; ke would have to pay Rs 10 crore; it would have been Rs 7.75 crore for Jindal Strips; and so on.
Their net profits, therefore, would have been lower to that extent. Showing profits growth is important for a company. It is only this little number--and its stockmarket derivative, earnings per share (EPS)--that helps a company raise inexpensive money. With the Indian economy open and with full convertibility round the corner, any entrepreneur worth his script would have to service his capital. Capital servicing comes not by doling out generous dividends, but by capital appreciation. And capital appreciation,
ceteris paribus , has a direct relationship with EPS.
So, what's happening? It is quite unlikely that these companies ate evading taxes-an economic offence. What these companies are doing is tax avoidance. While none of the companies is revealing the loopholes it has exploited, there are so many ambiguities in the Income Tax Act that finding ways to avoid tax is not difficult. For instance, it is not illegal to fight tax authorities. Thus, if there is a tax claim of Rs 100 crore on a company and the company says it is only Rs 10 crore, the matter gets disputed. If it can't be resolved with the taxmen, the next course is the courts. All this results in delays, during which the companies can enjoy the interest on the tax they would have to pay. Thus, if a case goes on for two years, a deferred tax liability of Rs 90 crore could earn an interest of Rs 32 crore during the period at 18 per cent interest. It could be even higher.
There is another provision that these companies are exploiting. These are provisions of Section 11JAA of the Income Tax Act, which allows companies to defer tax liabilities. Eicher, for instance, has made no provision towards MAT. According to the company, "this amount will get adjusted against its income tax liability for future years."
Not surprisingly, the private sector dominates the tax avoidance scene by hiring the services of top chartered accountants and lawyers. Professionals who can outthink policy makers, outwit analysts--and outrage taxmen. And quite legally too.