Finance minister P Chidambaram's 1996-97 budget proposal to levy a minimum alternate tax (MAT) on zero-tax companies and corporates paying very little tax has met with partial success in the first year of its introduction.
A BS study of 1,538 companies, which have so far declared their results for 1996-97, reveals that as many as 343 profit-making companies did not provide for any corporate tax last year
MAT was levied at the rate of 30 per cent on the book profits of all companies paying zero-tax or a very marginal tax, thereby entailing for all such companies a minimum tax outgo of 12.9 per cent of their profit before tax (PBT).
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Compared with 1995-96, Chidambaram of course made some progress. In 1995-96, as many as 1,048 companies (out of a sample study of 1,998 top companies) did not pay any tax.
The 343 companies had racked up an aggregate profit before tax of Rs 929
crore in 1996-97. However, they managed to avoid paying a single paisa as corporate tax to the exchequer by either carrying forward previous losses, charging higher depreciation, or taking advantage of the tax benefits still available to export-oriented units or those located in backward areas.
The study, conducted by BS Research Bureau, further shows that the tax provision by 351 minimum or zero-tax companies during 1996-97 averaged 7.3 per cent of PBT instead of 12.9 per cent prescribed by MAT. This means that 351 companies, on a profit before tax of Rs 5,525 crore, made a tax provision of Rs 403 crore, whereas they should have actually provided for a tax payment of Rs 713 crore.Of these 351 companies, 188 were zero-tax companies.
But they provided tax at an average rate of 6.9 per cent of PBT of Rs 3,552 crore. The remaining 163 minimum tax-paying companies made a tax provision of 8.1 per cent on a PBT of Rs 1,973 crore.
This means that 188 zero-tax companies made tax provisions of Rs 244 crore instead of Rs 458 crore; and 163 minimum tax paying companies paid Rs 175 crore as against a MAT-ordained Rs 254 crore.
Some of the previously zero-tax companies, which managed to pay less than 12.9 per cent of PBT as tax, are Reliance Industries, Gujarat Heavy Chemicals, Torrent Pharmaceuticals, Dabur, Max India, Arvind Mills, Videocon Appliances, MMTC, Dr Reddy's Labs, Century Textiles, SPIC, Eicher Motors, ITC Bhadrachalam, JK Chemicals and Mukand.
Chidambaram succeeded in his goal of extracting a minimum tax of 12.9 per cent only in respect of 253 companies.
These companies paid no tax in 1995-96 but, thanks to MAT, were forced to cough up Rs 407 crore as tax on their aggregate PBT of Rs 3,080 crore in 1996-97. The average tax paid worked out to 13.2 per cent of PBT. How could so many companies manage to pay a tax lower than the 12.9 per cent of PBT as prescribed under MAT? According to C N Mujumdar, senior vice president, Meghraj Financial Services (India) Pvt. Ltd., the modus operandi was very simple.
The company with unabsorbed depreciation of the previous years changed the method of computing depreciation provision from the straight line method (SLM) to the written down value (WDV) method. Additional depreciation computed by changing the depreciation method reduced the book profit of the company and, hence, the tax liability of the company. To show healthy bottomline in the annual reports, the additional depreciation was set-off
against the general reserves of the company.
S Madhavan, company secretary of Thirumalai Chemicals, admitted that the change in the depreciation method had enabled it to show lower book profits. Thirumalai Chemicals earned a profit before tax of Rs 17.54 crore for 1996-97 and made a tax provision of Rs 1.12 crore which works out to 6.4 per cent of PBT.
By changing the computation of depreciation on maleic anhydride plant, the company charged higher depreciation.
The higher depreciation was then set off against the general reserves.
Reliance Industries, which paid an income tax at the rate of 3.3 per cent of PBT, used the same methodology. By changing the method of calculating depreciation to the written down value, it made a depreciation provision of Rs 1352.33 crore in 1996-97 as against 336.51 crore in 1995-96.
The change meant that the company's book profit came down to Rs 425.5 crore on which the company paid an income tax of Rs 45 crore.
While presenting the annual report to the shareholders, it showed a net profit of Rs 1,322.7 crore by setting off the higher depreciation of Rs 942.19 crore against general reserves of the previous year.