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A recent notification of the Ministry of Corporate Affairs has opened the track for lower taxation of Indian Railways Finance Corporation (IRFC), the market borrowing arm of Indian Railways. This shall result in higher valuation and could speed up the green signal for an initial public offer of the company.
The Ministry’s move can get the tax burden on IRFC down to 25 per cent from 56 per cent, IRFC’s Managing Director Santosh Kumar Pattanayak told BusinessLine .
The will also result in increasing reserves and surplus, which it can use to up the equity of the company, without seeking it from the Railway Ministry. The extent of higher equity each year will increase its market borrowing capacity by ten times that of equity infusion.
Exemption to AS22 rules
On February 5, the Ministry of Corporate Affairs issued a notification stating that the deferred tax liability (DTL) shall not apply for seven years with effect from the April 1, 2017, to a government company that is engaged in the business of infrastructure finance leasing, with not less than seventy five per cent of its total revenue being generated from such business with government companies or other entities controlled by the Government. This is an exception to the rules of Accounting Standard 22 or Indian Accounting Standard 12 that relates to deferred tax liability. This issue had been referred to the Ministry of corporate affairs by the finance ministry.
IRFC said that the exemption is going to largely benefit the public sector enterprise, which is the dedicated market borrowing arm of the Ministry of Railways, and meets a major portion of the Extra Budgetary Resources (EBR) requirements through financial leasing model.
On the impact of the notification, “The accumulated DTL is Rs 6,392 crore as on March 31, 2017. which is going to be reversed and will form part of the net worth. Besides, the provision for tax will come down to 21 per cent from 56 per cent leading to substantial improvement in profit after tax, earnings per share and book value per share. This is going to improve the valuation of the company for its maiden IPO,” Santosh Kumar Pattanayak, Managing Director, IRFC, told Business Line .
Pattanayak explained that IRFC had “huge unabsorbed depreciation” because of which the company does not pay tax under normal assessment and is subject to minimum alternate tax (MAT) 21 per cent. Besides, the company has to make provision for DTL at the rate of 35 per cent.
As a result, the company’s books are bearing a total tax provision of 56 per cent which has led to substantial reduction in the profit after tax (PAT) and in turn, inadequate accretion to reserves and surplus for which equity infusion has been sought from railway ministry at regular intervals.
Incidentally, in the previous budget, the Finance Minister had announced that the IRFC will be disinvested, something that the Railway Ministry was not aware of at that time and learnt of the news from budget announcement. This budget, the Finance Minister had said that the issue of “Deferred Tax Liability for IRFC is pending with the Ministry of Corporate Affairs.”
IRCTC and RVNL are preparing the draft red herring prospectus, according to the Budget documents.
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