The Hindu Business Line : Disputed tax burden rising for India Inc

TAXES are the price of civilisation, said Justice Oliver Wendell Holmes. Corporate India, however, does not appear to share his enthusiasm if the surge in disputed taxes are any indication.

Indeed, the disputes arising out of demand notices totalling more than Rs 1,000 crore slapped on companies such as Wipro, Tata Sons, Slocum Investments (promoter of HCL Technologies) and Zuari Industries, in the last couple of weeks are not isolated events.

The Indian corporate sector and the tax authorities have been engaged in a battle of attrition in the last few years that would please the lawyers. Aggregate disputed taxes and duties for BSE 500 companies have been surging at an annual rate of 15 per cent in the period between April 2000 and March 2003. Incidentally, it is not only income-tax disputes that are rising. Sales tax disputes are increasing too.

Tax authorities had, however, stayed clear of software companies until now. IT majors such as Infosys, Wipro, Satyam and HCL Technologies did not have any disputes with income-tax authorities till the period ending March 2003. Tax authorities had instead trained their guns on public sector behemoths. For instance, MTNL has disputed income taxes worth over Rs 3,000 crore. This is true of disputes relating to sales tax and excise duties as well. Public sector majors such as GAIL (India), HPCL, SAIL, BPCL and Maruti Udyog had outstanding disputes running into several hundred crores of rupees with either sales tax or excise authorities.

These disputed liabilities, however, do not seem to be taken seriously by the stock markets. Consider GAIL. The disputed liabilities of GAIL were Rs 3,500 crore at the end of March 2003 - slightly more than twice its net profits. The stock has been one of the top performers over the last 12 months. Sources in the fund management industry indicate that analysts talk to company managements on this issue and take a view based on the strength of their case.

For instance, Mr Sivasubramanian KN, Senior Vice-President & Portfolio Manager - equity, Franklin Templeton, said, "We normally take a view on the maintainability of the various tax claims. This obviously will vary from company to company and the same is factored in our valuation models."

Invariably, however, investors tend to go with the management's assessment, which usually dispute the claims of the tax authorities. The record of tax authorities in past cases such as the Rs 400-crore income-tax dispute involving Tata Chemicals, in which the Supreme Court ruled in the company's favour, are also a factor.

In addition, since litigation is usually protracted, companies have time to make provision for the amounts without significantly affecting future profits. A fund manager at one of the leading asset management companies says, "Till the contingent liability actually becomes a liability, and the dispute lingers for a long period of time, the market actually absorbs it and discounts the liability."