Life Insurance Corporation of India (LIC) Ltd’s draft share sale documents reveal that the state-run insurance behemoth is battling the government in several courts over demands that it pay a staggering ₹74,894.5 crore in back taxes.
Of the 63 major tax cases, 37 are related to direct taxes, involving an amount of ₹72,762.3 crore and 26 are indirect tax cases involving ₹2,132.3 crore, the documents showed.
The amount under tax litigation is by far the country’s largest involving a single entity, and if LIC loses even some of these cases against the government, it may lead to a significant cash outgo.
A close look at the prospectus shows that LIC’s tax cases have accumulated over several years. Most of the cases relate to allegations made by the income tax department that LIC misrepresented its total income for several assessment years since 2005.
According to LIC’s draft red herring prospectus (DRHP), it has not set aside funds to cover tax liabilities that may arise because of unfavourable verdicts by the courts in cases involving about ₹24,728.03 crore. The insurer is set to hit the public markets with the country’s largest-ever initial public offering, estimated to be around ₹75,000 crore.
These liabilities may result in a significant future outgo of cash from LIC, which has steadily declined over the past three years. This, in turn, may diminish the prospects of returns for LIC’s public shareholders as the chunky cash outflows may crimp its ability to grow and even accelerate a drop in the insurer’s market share.
A spokesperson for LIC declined to comment on the matter. According to the latest financial disclosure by LIC, the insurer’s cash and cash equivalents, which represents the company’s disposable cash and liquid investments, stood at ₹26,122.95 crore at the end of September. For fiscal 2021, it was at ₹36,117.68 crore, a decline from ₹63,194.34 crore in the previous fiscal and ₹67,905.95 crore in fiscal 2019.
“If these appeals are ruled in favour of the department, it will create a huge tax impact on the profits as well as cash flow of LIC considering that the Surplus before appropriation for FY21 as per consolidated statement of profit & loss account shareholders’ account (non-technical account) was ₹2,974 crore only,” said Jignesh Shah, Partner, Bhuta Shah & Co. LLP, a tax consulting firm.
