Reliance – the Zero tax Emperor

In the statement of profit and loss for 2019-20, the profit before tax shown by Reliance Industries was Rs 40,316 crore on a revenue of Rs 365,202 crore. Continuous investments on fresh projects helped the company claim large amounts as depreciation/amortisation expense. These amounted to Rs 9728 crore for 2019-20. Such financial management had enabled the industrial giant to keep tax outgo pretty low: for the year current tax was shown as Rs 7200 crore and deferred tax as Rs 2213 crore.  

RIL’s PR spinners showed handsome figures for the decade 2010 to 2020 as contribution to national exchequer (Rs 54,842 crore for 2019-20). –  SV 

The rise and fall of the leasing industry in India happened in a matter of a couple of decades. The rise is attributable to the benefit of capital allowances being captured in the books of the leasing company thereby minimizing the tax outgo together with faulty accounting practices. The fall was caused by gradual removal of tax incentives, introduction of minimum alternative taxes and the change in the accounting rules that necessitated a better matching of the income and corresponding capital charges. 

Farouk Irani pioneered the concept in the mid 1970s and set up the First Leasing Company of India Ltd in association with SPIC Group’s A C Muthiah. Till then the business of lending was largely driven by the hire purchase model which was a security based lending. The ground for leasing became fertile with the tax law having major incentives for asset ownership used in the manufacturing industry. First Leasing capitalised on the fact that asset-intensive industry would normally have less appetite for tax allowances in the early years. By separating the ownership and usage, the arbitrage was fully exploited. The concept of matching the income from leasing with the right amortisation of the capital value was absent and the company law did not tune itself to this innovation and continued with nominal rates of depreciation on straight line basis. The companies started reporting very rosy post-tax profits and aided by a stock market that had very little transparency and weak audit oversight, the investors were milked for high premiums and the industry almost resembled a ponzi scheme. The assets chosen for leasing were also highly risky like film roles and scaffolding sheets due to the high depreciation allowed on these under the Income Tax Act. When tax authorities questioned the eligibility of the industry to allowances like investment allowance, N A Palkhivala appeared for First Leasing before the income tax tribunal in Chennai and secured the addmissibity of the tax benefit. 

However greed and over-trading by the industry and banks failing to monitor the rampant borrowing against non-existent assets or double financing the same asset, gradually led to market disillusionment. The change in accounting and tax laws finally rung curtains down on this industry which stands now discredited by the failure of some of the biggest names like First Leasing, Tata Finance and numerous other players. 

All this did not prevent the rise and seismic collapse of ILFS taking almost the entire economy down in its demise in 2017!! -VR  ( The author is a CA and CS and retired as a partner at EY, Chennai.)

 “Once Anantharamakrishnan was going to pay Rs 75 lakh as corporation tax for one company alone. I told him that it could be diverted for some industrial research, some charitable or educational purpose. But Anantharamakrishnan said he will do it no doubt, but then it will not be at the cost of avoiding tax.” – R Venkataraman. 

Anantharamakrishnan remained steadfast to his last in paying out correctly taxes that became due; but the era of tax planning unfolded much later in the 1970s when tax rates stiffened and incentives for investments expanded. Palkhivala and Dhirubai Ambani unfolded their grand designs of nil or low levels of corporate tax payments by conceiving and implementing year after year, large projects, the depreciation and incentives on which enabled the concerned unit to pay little or no taxes. 

Look at the record of TELCO in an era when it expanded massively: in the years 1975–76 to 1985–86 sales of TELCO increased from Rs 270 crore to Rs 1002 crore; profits before taxes for these 11 years amounted to Rs 212.03 crore; but Moolgaokar’s many-faceted expansion and Palkhivala’s tax planning limited tax payments to a paltry Rs 9.31 crore. In seven out of 11 years the company paid zero income tax! 

In the absence of the Simpson Group conceiving projects involving, at a time, sizeable investments, not much benefit had been derived by the group from the tax incentives that were liberally made available for encouraging investments. Right through the years when handsome investment allowances were available, the group derived little advantage. For 1989-90, for instance, the year in which Simpsons recorded a handsome jump in profits, the pay out by way of corporate taxes also increased steeply to Rs 2.17 crore from Rs 73.50 lakh for the previous year. Outgo in interest charges has also been sizeable – over Rs 3 crore for each of the two previous years related to a turnover of Rs 77 crore.  

While the group deserves the kudos for its sense of duty by the state, yet it may also be construed as an index of the inability to conceive and implement large projects that will help it save on taxes and plough back such savings into new projects.                                                                                                                                                                                      –SV  (From IE August 1990 issue.)