How Ambani managed extremely low tax rates

The story: Mukesh Ambani's Reliance Industries managed a 35 per cent growth in profits (Rs.53,739 crore) for 2020-21 in a pandemic year. The bottomlin

How Ambani managed extremely low tax rates

---

• The story: Mukesh Ambani's Reliance Industries managed a 35 per cent growth in profits (Rs.53,739 crore) for 2020-21 in a pandemic year. The bottomline growth is largely attributable not so much to excellent business performance but to unprecedented tax relief. Experts remember the 1980s/90s when RIL paid zero tax.
• Very low tax: On a pre-tax profit (after exceptional items) of Rs.55,461 crore, RIL paid just Rs.1,722 crore as tax. This is 87.5 per cent lower than the Rs.13,726 crore provided for tax in FY20. RIL’s effective tax rate (ETR) is a very low 3.10 per cent in FY21 compared to 23.65 per cent in FY20. The ETR is an entity’s tax expense as a percentage of profit-before-tax.
• Ambani magic: RIL’s balance-sheet shows the tax shelters and some indicative analysis by experts of Hindu Businessline found that -
1. Tax shelter from US buy - A Rs.14,882-crore allowance net of MAT credit, Rs.8,517-crore incremental deferred tax assets, and Rs.4,261 crore of carried forward losses are the three key items that enabled RIL reduce its tax liability.
2. The deferred tax asset is possibly linked to RIL’s rejig of its US shale gas assets. The Rs.8,517-crore incremental deferred tax assets mostly arise from RIL acquiring Reliance Holdings USA (RHUSA). As RIL has recognised a Rs.33,217-crore loss on the acquisition, RHUSA must have been loss-making. However, RIL’s motivation to acquire RHUSA is not clear. Information on losses and unabsorbed depreciation are not disclosed.
3. SEZ allowance - The story behind the Rs.14,882-crore allowance net of MAT credit is more interesting. It is likely linked to a November 2020 judgment of the Income Tax Appellate Tribunal’s Mumbai Bench in an RIL case. One issue before the Tribunal was if a deduction under Section 10AA of the Income Tax Act should be based on profits as computed under the Act (after deductions for depreciation, investment allowance, etc.) or based on commercial profits calculated before such deductions. Section 10 AA relates to tax holiday for profits earned by units located in Special Economic Zones. RIL operates a 7,04,000 barrels per day SEZ refinery at Jamnagar. The Tribunal ruled in favour of RIL holding that the tax deduction ought to be on commercial profits and not on profit post deductions. So not only is the entire commercial profits from the SEZ refinery tax-free but RIL also gets the benefit of depreciation and investment allowance for the SEZ refinery in its P&L account. That, in effect, is a double deduction benefit. FY21 is not the first year RIL got this benefit; in FY20, it had set off Rs.10,455 crore similarly even as it awaited the Tribunal’s judgment.
4. Then comes the benefit from the shift by group entities to the lower corporate tax regime as offered under the Income Tax Act. Reliance explains
• RIL’s ETR compared with peers: BusinessLine experts benchmarked RIL’s ETR with those of oil marketing companies, Bharti Airtel, and D-Mart. The rationale is that RIL’s ETR is likely to be a blended rate of the peers in its key businesses over a 5-year period. Contrary to this logic and unsurprisingly, RIL’s ETR has been the lowest among peers. RIL consistently achieving low effective tax rates raises concerns regarding the quality and transparency of its disclosures.
• Summary: Experts say that India’s biggest company is vying to be among world’s best and has attracted investors like Facebook and Google but it owes a great deal more clarity in its financial statements. The company provides consolidated accounts of every diverse business with highly differing tax treatments of the income stream. When the final tax position is at variance with the past and the industry average, any investor would want more details than in other cases. One hopes the company will issue a clarification that sets high standards of transparency.

Join PT courses | PT Youtube | PT App | Contribute |  Testimonials