Deferred Tax Saves Blushes For Firms

The decline in net profits of the corporate sector during the quarter ended December 2001 is not bad as presented by the aggregate picture.

The aggregate net profit of 1,500-plus manufacturing companies shows they declined by 14.8 per cent to Rs 7,862 crore. The reality is very much different. The net profits, if adjusted for the provision for deferred tax by tax-paying companies, the decline comes down to a marginal 1.78 per cent.

From the current year, the income tax liability of the tax-paying companies has been calculated in accordance with the requirement of the Accounting Standard 22 for accounting for taxes on income. The deferred tax liability is the difference between tax calculated as per AS22, which is assumed to be 35 per cent of the pre-tax profits and actual tax provided for income tax purpose.

On the basis of the data available, it has been assumed that the provision on account of deferred tax liabilities is estimated to be around Rs 1,200 crore.

If one rolls back this liabilities in the aggregate net profit of Rs 7,862 crore achieved by 1,519 companies, the net profit for these companies reworked at Rs 9,062 crore for October-December 2001. As such, the decline in net profits comes down to a modest 1.78 per cent over the net profits of Rs 9,226 crore posted by 1,519 companies during October-December 2000.

The assumption for the deferred payment has been made on the following basis. Since the data for deferred payment has been available for 127 companies, the expected tax liabilities has been worked by taking the ratio of deferred tax to net profits of 127 companies, which was worked at 14.70 per cent. The ratio was made applicable to 568 tax-paying companies, which reported an aggregate net profit of Rs 8,017 crore.

The top corporates which have provided for the deferred tax during the quarter were IBP (Rs 38.75 crore), Chambal Fertilisers (Rs 23.80 crore), Neyveli Lignite (Rs 21.16 crore), Tata Power (Rs 21 crore) and ACC (Rs 9.96 crore).