Decoding RIL tax rate. Decoding Reliance Ind’s 3% effective tax rate

As Reliance Industries’ shareholders log onto the annual general meeting on Thursday, they will do so with satisfaction. After all, the company managed a 35 per cent growth in profits (₹53,739 crore) for 2020-21 in a pandemic year.

But what most may not know is that much of the bottomline growth is attributable not so much to excellent business performance as to unprecedented tax relief, reminiscent of the 1980s/90s when RIL paid zero tax.

Piffling Effective Tax Rate

On a pre-tax profit (after exceptional items) of ₹55,461 crore, RIL paid just ₹1,722 crore as tax. This is 87.5 per cent lower than the ₹13,726 crore provided for tax in FY20.

RIL’s effective tax rate (ETR) is a piffling 3.10 per cent in FY21 compared to 23.65 per cent in FY20. The ETR is an entity’s tax expense as a percentage of profit-before-tax. How did the company manage this?

BusinessLine looked at RIL’s balance-sheet to spot the tax shelters used and here’s what we found. A note of caution: Given the opaque disclosures in the annual report, the findings are only indicative.

Tax shelter from US buy

A ₹14,882-crore allowance net of MAT credit, ₹8,517-crore incremental deferred tax assets, and ₹4,261 crore of carried forward losses are the three key items that enabled the conglomerate reduce its tax liability. But what’s the story behind each of these numbers?

According to Sriram Veeraraghavan, partner at Sammati Consulting & Analytics, the deferred tax asset is possibly linked to RIL’s rejig of its US shale gas assets. “The ₹8,517-crore incremental deferred tax assets mostly arise from RIL acquiring Reliance Holdings USA (RHUSA). As RIL has recognised a ₹33,217-crore loss on the acquisition, RHUSA must have been loss-making. However, RIL’s motivation to acquire RHUSA is not clear. Information on losses and unabsorbed depreciation are not disclosed,” he says.

SEZ allowance

The story behind the ₹14,882-crore allowance net of MAT credit is more interesting. It is likely linked to a November 2020 judgment of the Income Tax Appellate Tribunal’s Mumbai Bench in an RIL case. One issue before the Tribunal was if a deduction under Section 10AA of the Income Tax Act should be based on profits as computed under the Act (after deductions for depreciation, investment allowance, etc.) or based on commercial profits calculated before such deductions. Section 10 AA relates to tax holiday for profits earned by units located in Special Economic Zones. RIL operates a 7,04,000 barrels per day SEZ refinery at Jamnagar.

The Tribunal ruled in favour of RIL holding that the tax deduction ought to be on commercial profits and not on profit post deductions. Therefore, not only is the entire commercial profits from the SEZ refinery tax-free but RIL also gets the benefit of depreciation and investment allowance for the SEZ refinery in its P&L account. That, in effect, is a double deduction benefit. FY21 is not the first year RIL got this benefit; in FY20, it had set off ₹10,455 crore similarly even as it awaited the Tribunal’s judgment.

And, then, is the benefit from the shift by group entities to the lower corporate tax regime as offered under the Income Tax Act.

Reliance explains

To BusinessLine’s queries, the company said: “The tax rate is lower in FY20-21 (a). on account of a shift to lower tax regime in case of group entities, planned restructuring of business and utilisation of past tax credits (MAT). And, (b). Lower deferred tax is on account of planned restructuring of business. The amount of ₹14,882 crore primarily comprises the tax impact of allowance based on tax provisions (primarily depreciation as per tax provision) and MAT credit utilisation.”

Lowest ETR among peers

RIL’s ETR has been consistently lower than the statutory tax rate from at least FY2017. The conglomerate has regularly used carried-forward losses, non-taxable subsidiaries and additional allowances to reduce its tax liability. The company paid nil corporate tax between 1971 and 1996 despite being one of the most profitable companies.

How does RIL’s ETR compare with its peers?

Finding a peer for a conglomerate is challenging, if not impossible. So, BusinessLine benchmarked RIL’s ETR with those of oil marketing companies, Bharti Airtel, and D-Mart. The rationale is that RIL’s ETR is likely to be a blended rate of the peers in its key businesses over a 5-year period. Contrary to this logic and unsurprisingly, RIL’s ETR has been the lowest among peers. (See graphic)

Occasionally, companies’ transactions give rise to tax allowances that enable them to reduce their tax liabilities, as IOC did in FY2017 and FY2021, BPCL in FY2020 and ONGC in FY2017. The decline in D-Mart’s ETR from FY2020 is due to the company opting to pay minimum alternate tax (MAT). However, RIL consistently achieving low effective tax rates raises concerns regarding the quality and transparency of its disclosures, say analysts.

Chartered accountant V. Ranganathan says: “India’s biggest company is vying to be among world’s best and has attracted investors like Facebook and Google but it owes a great deal more clarity in its financial statements. The company provides consolidated accounts of every diverse business with highly differing tax treatments of the income stream. When the final tax position is at variance with the past and the industry average, any investor would want more details than in other cases. One hopes the company will issue a clarification that sets high standards of transparency”.