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Public sector firms scout for audit cos to curb tax liabilities

Public sector firms scout for audit cos to curb tax liabilities
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First Published: Mon, Sep 17 2007. 01 16 AM IST

Expert view: Gaurav Taneja, national leader, Global Tax Advisory, Ernst & Young.
Expert view: Gaurav Taneja, national leader, Global Tax Advisory, Ernst & Young.
Updated: Mon, Sep 17 2007. 01 16 AM IST
Mumbai: Earlier this year, when Bharat Petroleum Corp. Ltd (BPCL), the state-owned oil refining and marketing company, was looking at hiring ships to transport crude oil, the company did something unusual. It approached an audit firm to figure out the tax implications of its contract.
Other public sector firms such as ONGC Ltd, Engineers India Ltd and Hindustan Aeronautics Ltd have also been scouting for advice.
“Many public sector undertakings (PSUs) pay up to 40% of the income from any
Expert view: Gaurav Taneja, national leader, Global Tax Advisory, Ernst & Young.
given contract as tax when they can legally reduce it,” says Girish Mistry, executive director of accounting firm PricewaterhouseCoopers. “Sometimes, the format in which the contracts is entered into is not properly drafted to reflect the commercial arrangement and therefore, the companies end up paying more tax than they need to. But, there seems to be sense of reticence among PSUs in doing this.”
ONGC executive director of finance J.B. Bansal says the company is planning to get into activities that would have lower tax implications. For example, ONGC’s initiative to set up power plants would result in considerable savings over the next few years as would the proposed investments in the Krishna-Godavari gas find.
ONGC is the country’s top corporate taxpayer with tax payments that amounted to Rs7,787 crore in 2006-07, up from Rs6,441 crore in 2005-06, some 33% and 30% respectively of its profits before tax. BPCL too paid about 34% of its pre-tax profit as tax last year, while the year before it paid only 6.05% (apart from deferred tax) owing to tax benefits allowable due to the refinery modernization programme that was initiated in that year.
BPCL’s director finance, S.K. Joshi, was not immediately available for comment.
Compare this with India’s largest corporate, Reliance Industries Ltd., which paid a tax of Rs1,484 crore on a pre-tax profit of Rs10,704 crore, or 11.17%, in 2006-07. In 2005-06, the firm paid 8.41% of its pre-tax profit of Rs9,068 crore as tax. Says Gaurav Taneja, national leader, Global Tax Advisory, Ernst & Young, a global advisory firm: “Unlike most corporates that buy assets in profitable years to offset tax but create an asset, most PSUs don’t follow this provision. Continuous expansion in terms of greenfield projects helps to offset tax while creating assets.”
Said Yogesh Garg, CEO, Infraline Energy an energy consultancy firm, “IOC or the other public sector refiners have not executed any greenfield projects in the last few years, except for some minor alterations, so they have not been able to claim tax rebates.”
A look at tax paid by the top 10 taxpayers in the country shows that eight of them are public sector undertakings, with Reliance and Tata Steel Ltd rounding off the list. Tata Steel paid 33% and 30% as tax over the past two fiscal years.
“Earlier,PSUs?wouldnot avail of available tax benefits as they would get into an activity and then figure out the tax liability on it. But now some of them are coming to consultans to figure out tax liabilities before signing contracts,” Mistry said
“Slowly, PSUs are waking up to the fact that they have to do tax planning,”added Taneja.
Mistry and Taneja say that most PSUs are not in businesses that qualify for rebates—such as telecom, or infrastructure related businesses like laying gas pipelines. For instance, Bharti Airtel Ltd, which provides telecom services across 23 telecom circles, is still enjoying a tax holiday on its investments in the sector and paid tax of 10.76% and 7.29% of profit before tax in the past two financial years.
gayatri.r@livemint.com
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First Published: Mon, Sep 17 2007. 01 16 AM IST