Tax ghost of Rs 6,390 crore returns to trouble listing-ready IRFC

Railways has sought waiver from MCA, saying it may improve valuation of the company

With the Department of Investment and Public Asset Management (Dipam) pushing for an immediate listing of Indian Railway Finance Corporation (IRFC), the demand by the company for waiver of its deferred tax liability (DTL) of Rs 6,389.91 crore has resurfaced. 

Indian Railways has sought the waiver from the Ministry of Corporate Affairs (MCA), saying it may improve the valuation of the company, as it will “help shore up the net worth, reducing the dependence on equity infusion from the railways ministry to maintain the financial gearing within tolerable limits.” On April 2, corporate affairs ministry came out with a notification that “deferred tax assets (DTA)” or DTL shall not apply to the company with effect from April 1, 2017”. 

“Based on the notification, the waiver was April 2017 onwards, but we already had a DTL of over Rs 6,300 crore till April 2017. We are asking the MCA for a relief, before going for the listing,” said a government official. A deferred tax liability is a tax that is due for a particular period but not yet paid. 

On Wednesday, Railways Minister Piyush Goyal had said Dipam will take a final call on when to list the railway PSUs (IRFC and IRCTC), depending on the market situation. The government had been pushing for listing of more PSUs to meet the divestment target of Rs 80,000 crore for the current fiscal year. As on December 28 last year (2018), the government has realised only Rs 34,142.35 crore as disinvestment proceeds, or 43 per cent of the target for 2018-19. 

Another official told Business Standard that the MCA is of the opinion that with “a waiver on the accumulated amount that will get added to the profit and loss accounts, may inflate the profits of the company for the year, adding an amount that will not be earned that year.” 

According to IRFC, deferred tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date till March 31, 2017. 

Due to the exemption starting from April 2017, the profit after tax (PAT) of IRFC saw an unprecedented increase of about 115 per cent to Rs 2,007.31 crore in 2017-18, as against Rs 933.81 crore for the previous year. For the last two financial years (2016-17 and 2017-18), there was no equity infusion from the railways into IRFC, bringing the debt/equity ratio under severe strain and was likely to hit the threshold of breaching the limit of 10x. Because of this, the company had to peg the dividend at 2016-17 level so as to have adequate internal generations for maintaining the debt/equity ratio. 

For the year ended March 2018, IRFC has funded moving asset acquisition of 645 locomotives, 3,947 passenger coaches and 6,290 freight wagons valued at Rs 18,669.86 crore. Its cumulative acquisition till last year remains at 8,998 locomotives, 51,857 passenger coaches and 2,20,746 freight wagons to the tune of Rs 1.69 trillion, besides providing funding support of Rs 6,905 crore to other railway entities such as Rail Vikas Nigam, IRCON International and  Rail Tel Corporation.