RIL – Zero tax but Profit Making Company
RELIANCE - ZER0 TAX BUT PROFIT-MAKING COMPANY (1966-1996)
Introduction:
Reliance industries limited (RIL): is an Indian multinational conglomerate company, it headquarters is situated in Mumbai. Reliance owns several businesses across India which are engaged in: Energy, Petrochemicals, Textiles, Natural resources, and telecommunications. Reliance is one of the most profitable companies in India.
Reliance was known for “zero tax but profit-making company” in India. Till 3 decades (1966-1996) after its listing, reliance did not ever pay a single penny as its corporate income tax on its companies’ profits or even though company felt that they need to make more token provision for it. To break the tax planning strategy of reliance, Income tax department introduced the concept of MAT (minimum alternative tax) in India.
Zero Tax company: are those businesses that shows a book profit and pays dividend to its investor but does not pays their taxes, this was the biggest problem in India back than where company like Reliance making profits in crore but still does not paying income tax .
Reason: In India 2 different business tax laws conflicted with each other.
Implication: A company was liable for taxes under the income tax act but P&L (profit and loss account) of the companies prepared under provisions of the companies Act. This meant that many companies showed book profits in their P& L a/c but their income under the income tax act was “Zero”.
“How Reliance manages to pay ‘zero tax’ for almost for 30 years?”
Reason:
Depreciation: In 1983-84 union budget Pranab Mukherjee made an amendment to Indian Tax law to crackdown this zero-tax strategy. back then, it was mandatory to ay 30 % of profits in tax after deprecation but before deductions. Reliance avoided this by capitalizing future interest payable on borrowings for its new projects, hugely increasing its asset value in one hit and allowing increased depreciation claims to deduct from profits, which results in low income.
Heavy dividends: Reliance used to pay at least 25% return on the face value of the share to its investors. Reliance was never India’s profitable (net worth), but they always rewarded their investors with high dividends
MAT (Minimum Alternative Tax) ; Such Zero tax companies like Reliance were showing book profits and declaring dividends to the shareholders but were not paying any taxes to income tax department .To counter this issue IT department introduced MAT in India
Objective of MAT
MAT made sure that any company with substantial income could note use exclusions, deductions or inclusions to avoid tax.
MAT another foremost objective is that companies pay fair amount of taxes to IT and further that amount can use for country growth.
Calculation of MAT
MAT is calculated as 15% of the book profit plus 4 % education cess plus a surcharge, if applicable, of the tax assesses or 30% of its IT profits (whichever is higher). Under existing rules, book profit is calculated as per Section 115JB of the Income Tax Act, 1961.
*For FY 2019-20, tax payable is computed at 15% (previously 18.5%) on book profit plus applicable cess and surcharge.
Example:
IT profit : 500 cr
MAT :750 cr
Balance = (750-500)
MAT Credit: = 250 crores
*Such tax credit shall be carried forward for 15 Assessment Years immediately succeeding the assessment year in which such credit has become allowable.
This is with effect from AY 2018-19. Prior to which MAT could be carried forward only for a period of 10 AYs.
Set off shall be allowed to the extent of difference between the tax on the total income under normal provision and tax which would have been payable as per MAT under section 115JB.
After the implication of MAT in India
According to sources: In 2013 Reliance has paid about Rs 50 crore as income tax for the current financial year. This is the first time ever that RIL has paid a tax in its over 20-year history. Which implies that after MAT reliance was no longer able maintain his “zero tax profit making company” image and paid taxes in crores.