Some media reports claim that one of the leading listed companies may have evaded income tax (I-T) to a staggering amount of Rs23,000 crore over a few years and that the amount could be upwards of Rs1,000 crore each year!
The company has confirmed that I-T officials are conducting a survey in its business premises and that they are providing all the necessary assistance.
The company manufactures and sells cement within the country and has only set up an overseas subsidiary in the Middle East for the same purpose in the recent few years.
Unlike in the services business, where it is somewhat possible to understate the size of the business and its turnover and income, cement manufacture cannot be easily carried on surreptitiously!
Cement consumers are predominantly in the organised sector, with the government being the biggest buyer directly and indirectly. Even construction industry, which is generally seen with jaundiced eyes, is not capable of doing all its building activity underground!
The company in question is one of the industry leaders with many awards to its credit and its annual reports are regarded as more transparent and informative than the ones commonly provided by any average listed company.
Cement has been historically one of the highest-taxed commodities next only to cigarettes and automobiles in terms of indirect taxes.
In view of this, the industry’s activities carried—and still do—a level of scrutiny far higher than most other businesses.
It is certainly easier and more profitable to smuggle a sack of cigarettes than cement!
Given this characteristic, the baffling question is: How on earth could this annual evasion of Rs1,000 crore (total of Rs23,000 crore) have taken place only on account of income-tax? Even if indirect taxes like excise duty and its successor goods and services tax (GST) is added for effect, it is difficult to get the arithmetic right!
To set the record straight, there has been no official claim of any number from the I-T department in this instance, though it has been publicising its discovery in many other cases. The figure is as speculated in the media. But the media touting this is no WhatsApp/ Twitter type message but some credible TV channels.
Since the company is a listed entity and provides enough financial information in its reports, the curiosity to examine the data was not easy to suppress.
In the latest result for FY22-23 announced a month ago, on a profit before tax (PBT) of Rs1,495 crore, the tax provision is Rs225 crore. There are two aspects to this data. The first is that the tax number is just half of the previous year’s figure. The second aspect is that the effective tax rate (ETR) works out to only 15%.
The first aspect is explained by a sharp drop in profits which has been an industry-wide phenomenon. The second will be duly explained in the subsequent paras.
It is also possible that the company may have fallen short of the tax authorities’ expectation on the payment of tax on 15th June, triggering the search operation in its immediate aftermath!
The company is located in Rajasthan and the local commissioner was perhaps pulled up for not generating the same level of revenue growth as the overall national number which was widely publicised by the central board of direct taxes (CBDT) last month!
Whatever be the fact or the fiction in this episode, it is essential to crunch some numbers to make this analysis scientific.
The company, in the six years between FY16-17 and FY21-22, has paid taxes (as per accounting provision) at an average effective rate of 19.63%. As mentioned earlier, the ETR is lower in FY22-23, at about 15%. The average for the previous six years is based on the cumulative provision for the said period as a percentage of the cumulative pre-tax income (PBT).
This figure, in abstract, conveys little and needs some benchmark to be compared with. One such benchmark can be the ETR of other cement companies. Those with an appetite for intensive Excel operation can work out the same.
For a crude comparison, the data available on tax payments across categories of taxpayers for the latest year (AY 2020-21) as provided by the CBDT is reckoned.
Since the company returns income exceeding Rs500 crore, the average rate of tax paid by the taxpayers in that category is taken, which is 25.66%.
However, it should be noted that the average above is worked out on the total income returned whereas the one for the company is based on PBT. Generally, the total income in the tax return is lower than PBT, accounting for the slightly elevated number as per the CBDT data.
Yet, there is a gap, if not the full six percentage points, between the ETR of the company and that of the overall universe of taxpayers returning income above Rs500 crore.
The other information available in the annual report of the company is that it has income that is tax-free/ eligible for exemption. There are no details about the source.
However, it is known that in industries like cement, paper and sugar, captive power generation is a norm, which historically enjoyed tax relief. Quite possibly, this advantage has been taken. The revenue also reflects the sale of power, implying that the excess power generated was sold.
In fact, the total figure for the tax on exempt income for the six years analysed is Rs1,695 crore, almost bridging the gap in the effective tax rate as analysed above.
Given this finding, it is most intriguing to reconcile the elephantine figure of Rs23,000 crore that has been floated in the media.
The only possibility is if the company has its mirror image somewhere for which it has omitted to submit the tax papers for two decades!
The board of directors (BoD) of Shree Cement Ltd has some very eminent names as independent directors. Its task is cut out to clear the air at the earliest on this issue, since the tax proceedings after a search seldom see the light of the day expeditiously, despite the tall claims on the quantum of evasion.
Unlike the normal practice to provide general placatory statements that the company is highly compliant and that the I-T searches are routine but all assistance is being rendered, the company should, upon receiving the first official communication on the alleged evasion, get a credible outside agency to validate the company’s position and publish it for the benefit of its investors.
The reputation of any company is built brick by brick but the reverse is quick and swift like how an old building is brought down in minutes by a dynamite explosion.
There is much at stake here for the public shareholders who hold almost 40% and the market-cap of Rs90,000 crore is not something to trifle with.
Should the company credibly establish that it has done no wrong, then the I-T investigation may stand explained as an exercise to explore some extraction towards the ensuing state elections!
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)