Brahmachari Balance Sheet!!

Finding a needle in a haystack!!

Years ago when accountancy teachers wished to get their students better tuned into the discussions, would say,” balance sheets are like a bikini- what it reveals is stimulating, but what it hides is substantive!!”

But what has brahmacharya to do with bikinis, especially when the article is not discussing the gurus of the land?! Hold your curiosity back and discover in the end, if at all!!

Surprisingly, little in the form of discussion have I noticed in the media of a company’ tax provision for the YE 31/3/2021 drop by Rs12000cr, roughly 3% of the country’ reported net corporate tax collection for 2020-21 of Rs 4.57lac cr!

The effective tax rate of this case for YE 31/3/2021 is 3.1% against the ETR of 25.6% in 2019-20.

For someone who bought shares of companies just to get the balance sheets in an era when only a minimum market lot of shares can usually be bought, it was difficult to curb the inquisitiveness to uncover the mystery  though the more informed media experts seem to have found nothing amiss or curious in this to report or debate!!  

Interestingly, the company showcases its annual performance in a modest press note of just 58 pages which can be mistaken for an annual report by the less well informed!

The annual report must be under designing and was almost 450 pages in the last year, celebrating naya india ka naya josh and may show a growth of 25% in pages to please its burgeoning investor base which is well above 50% of the population of Singapore!!

The major contribution in the guise of protecting the investor interest in recent years has been the increasing size of the annual reports to encyclopaedic levels and submerging the accounts in an ocean of inconsequential information and leaving it to the whiles and tech savviness of the reader to ferret out the key facts.

To get back to the issue on hand, the press note seeks to explain to the inquisitive and impertinent investors seeking unnecessary clarity on this matter with the note below-

“The current tax reduced to ₹ 2,205 crore primarily on account of lower tax rates as per the new tax ordinance and planned restructuring of businesses. • Lower deferred tax was primarily on account of planned restructuring of businesses”

This is indeed like the famed indus script which none other than one of the top ministers of the present day has successfully deciphered!! I could not be held back having attempted to learn the income tax act well over four decades and still haven’t given up in the pursuit!

I leafed through some more pages if such is possible when one is scrolling uncomfortably the pages, and there was another interesting data that the deferred tax liability has dipped by a modest Rs20,000cr(approx.) from the previous year figure of Rs 50,556cr. This is still not the eureka moment as the note above talks of some event of ‘planned restructuring’ reducing the current tax out go in cash terms!

Though my knowledge of the subject is lot less than perfect, it is difficult to reconcile the present law with a ETR of 3%, especially as the company has congratulated itself having done splendidly on the business front despite the odds of the pandemic. It is not relevant to the present enquiry that the net cashflow from the operating activity as given in the standalone accounts discloses a precipitous drop of an incredible Rs78,000 cr!!

But the consolidated profit of Rs55,461cr though seemingly at odds with the downswing in the cash flow, being audited by two joint auditors, cannot be viewed with any suspicion.

The puzzle for any curious reader to resolve is identifying elements of income comprised in Rs55461 cr that has no tax applicable thereon to reach a 3% ETR.

The spin of restructuring helping to reduce the tax outgo seems a direct affront to the new entity known as ‘GAAR Panel’!! Nevertheless, the benefit of  doubt is always in favour of the striker and hence the next item to enquire is how any restructuring can help reduce taxes unless the case is of a merger with a loss-making unit. In this regard another inscrutable note comes to the aid of transparency and full disclosure.

“The Company has recognised loss of ` 33,217 crore in the Statement of Profit and Loss due to take over of Reliance Holding USA Inc. (RHUSA) loan (Part of Oil & Gas segment), which was guaranteed / supported by the letter of comfort, given by the Company. Further, these loans were taken over by the Company subsequent to approval received from lenders of RHUSA and Reserve Bank of India. Pursuant to the Composite Scheme of Amalgamation and Plan of Merger (the “Scheme”) approved by the Hon’ble National Company Law Tribunal, Mumbai bench, vide order dated July 27, 2020, RHUSA has merged with Reliance Energy Generation and Distribution Limited (REGDL) and REGDL has merged with the Company. In accordance with the provisions of the Scheme the Company has withdrawn consequential loss of ` 33,217 crore from retained earnings to the Statement of Profit and Loss. The above merger being a common control business combination, the financial information of the wholly owned subsidiaries are included in the financial results of the Company and has been restated for comparative purpose from the appointed date, which is the date as prescribed in the Scheme approved by the NCLT and is as per MCA General Circular dated August 21, 2019, overriding the requirements of Appendix C of Ind AS 103, based on the accepted accounting practice”.

If the above note causes one to immediately pick up a bottle of smelling salts, another one tucked away says-

’ Recognition of Deferred Tax Asset relating to Shale Gas Investments Rs15,570 cr’

Possibly the deferred tax asset is an outcome of the above referred merger and its impact on reduction of the tax outgo in the current year seems remote. But one should say in all humility that it is better to disclose our collective ignorance than challenge the titan that may have done everything within the relevant corners of the law.

Getting closer to the finish line it is imperative to bring the readers’ attention to another note-

‘The deferred tax expense for the current quarter is ₹ 778 crore as against deferred tax reversal of ₹ 207 crore in the trailing quarter. Pending approval of the scheme by NCLT with respect to transfer of O2C undertaking by the Company, deferred tax assets for the quarter on the said transfer have not been recognised and the same will be recognised once the said scheme gets approved. Deferred Tax Liabilities (Net) 37,001cr PY 54,123cr’

The above, to those who missed to read my earlier post ‘Corporate Brahman’ refers to the mother of all restructuring ever undertaken in this land and is admittedly pending with the approving authority and not recognised in the present accounts for its tax effects. So this as well fails to provide the key!!

I may need to plead guilty if I have unnecessarily wasted the time of everyone reading this on a matter that is self-explanatory and hence not considered necessary by media to dissect!!

Just as bramhacharya is said improves ojas and tejas , the holding back of vital clues seem to improve the ojas and tejas  of the top corporate’ annual numbers!!

Note

Since I couldn’t find the answer, I have not provided it! Many among the readers are accomplished experts and seek their indulgence to walk through the 58 page statement and help answer the question whether any  profitable company can reach a ETR of 3% ? Will await till the next post!!