New Code may be taxing for capital-intensive cos

New Code may be taxing for capital-intensive cos
The Hindu Business Line, October 19, 2009, Page 3

Vidya Bala

BL Research Bureau The change over to asset-based taxation, proposed in the draft Direct Taxes Code (DTC) could double the tax outgo for at least 40 per cent of the companies in the S&P CNX 500 universe.

This is despite the proposal providing for a lower corporate tax rate of 25 per cent (current 30 per cent). A loss-making company such as Jet Airways, for instance, may have to cough up over Rs 300 crore as presumptive tax in the new regime, when it pays no tax and enjoys refunds now.

Reliance Communications, NTPC, Ranbaxy Laboratories, Power Grid Corporation and Tata Motors are some of the companies that may see a two- to 50-fold jump in their tax liability. The new Code proposes that companies should pay tax at the higher of two parameters: The tax calculated on total profits at the prescribed rates or tax calculated at 2 per cent of the value of a company’s ‘gross assets’ (0.25 per cent of gross assets in the case of banking companies).

Weighed down by assets


A calculation for the S&P CNX 500 companies, using a conservative interpretation of ‘gross assets’, as defined by the Code, suggests that 220 companies from that universe may shell out higher income tax, if the proposal is implemented (based on the 2008-09 tax liability and balance-sheets). A large number of companies in the pharma, steel, telecom, power and non-banking finance companies are likely to see a spike in the tax outgo if the draft takes effect in its current form.

Capital-intensive companies with a large asset base and companies carrying high investments/cash on their balance-sheet would typically be hurt by this proposal. For investors, this could mean lower net profits.

Unaffected

Interestingly, not all asset-heavy companies would suffer under this proposed tax structure. The tax liability for FY-09 of companies such as ONGC, SAIL, Bharti Airtel, BHEL and Larsen & Toubro is already higher than the 2 per cent tax calculated on their gross assets. Higher depreciated assets and consequent higher asset turnover, taken with high profit margins of these companies, are perhaps why this proposal will not hurt them despite their capital-intensiveness. IT companies such as Infosys and Wipro may also avoid the gross asset tax given their relatively asset-light business.

Background

Why would the proposal result in inflating companies’ tax outgo? Under the current tax regime, corporates pay their taxes on profits, at the rate specified by the Income-Tax Act or pay a presumptive tax called the ‘Minimum Alternative Tax’ if they enjoy tax holidays/incentives. The latter is calculated at 15 per cent of their book profits. The draft Direct Taxes Code, in a move to ensure efficient utilisation of assets, proposes to do away with the MAT clause and levy tax on the gross assets.

Gross asset is defined as the sum of the gross block of fixed assets, capital work-in-progress and book value of all other assets (including cash) reduced by accumulated depreciation and debit balance of profit and loss account. While the definition of gross assets per se is being debated, companies with large fixed assets that are yet to generate high profits may find the proposal unfriendly. Such tax paid would also not be available for any carry forward and set off, unlike the MAT credit now available.