A faulty tax assessment system is letting large conglomerates get away with paying lower taxes, according to a confidential document written by the Indian Audit and Accounts Department.
Using billionaire Mukesh Ambani's Reliance Industries Ltd (RIL) as a test case, the Director General of Audit (Central) in Mumbai at the Indian Audit and Accounts Department conducted an integrated audit of India’s most valued company. The intent was to “examine the impact of scrutiny assessment and extent of co-ordination/cross-linking amongst different assessment charges of the Income Tax Department and ascertain whether there was exchange of relevant information relating to group companies for accomplishing quality assessment,” according to the document seen by BusinessLine .
“We selected RIL as it is one of the biggest corporate entities in the country and engaged in diversified business activities,” wrote Guljari Lal, Director General of Audit (Central).
The integrated audit found that RIL allegedly used its web of subsidiaries, resorted to merger and demerger of group entities, transactions with related parties to book losses and make financial accounts untraceable to avoid paying thousands of crores of rupees in taxes over several years.
When contacted, a spokesperson for RIL said: “We are not privy to the CAG report on the Income Tax Assessments made on RIL and its group companies, and hence, are not in a position to comment on its contents. Please note that RIL pays its taxes in accordance with law and is one of the highest tax payers in private sector in India.
“RIL’s accounts are audited and there cannot be any difference in the recording of transactions among RIL and its group companies. If the facts stated in your query are correct, there seems to be a misunderstanding due to lack of full details on record with the tax department. The tax reliefs claimed by the group are always as allowed in accordance with law and as intended by the legislature. RIL never deploys any scheme to avoid tax burden.”
The Indian Audit and Accounts Department has asked the Principal Chief Commissioner of Income Tax, Mumbai, to share its views and confirm the facts of the integrated audit to be included in the FY-19 audit report of the Comptroller and Auditor General.
The scrutiny assessment looked at accounts of several of these entities for seven assessment years – AY03-04, 04-05 and 2007-08 to 2013-14.
During its scrutiny assessment, the department found that RIL had sold and purchased fixed assets and goods, extended and accepted loans, and made donations between its group entities, but the amounts given and received were allegedly not always the same in the books of several entities. The department faulted itself for viewing each entity as a standalone company and not seeing the conglomerate's actions as a whole, which allowed such wrongful transactions to slip through the cracks.
For example, in AY12-13, a loan extended by RIL to Reliance Industries and Investment Ltd was recorded as ₹2,625 crore in the former's books and as ₹2,113 crore in the latter's books – a discrepancy of ₹512 crore. Similarly, in 2013-14, another ₹7,684 crore loan extended by RIL to Reliance Industries & Investment Ltd was shown in the related party’s books as ₹7,735 crore.
According to assessment records, the net profit of RIL from 2008-09 to 2013-14 remained static despite three-fold increase in total revenue.
Between 2008-09 and 2013-14, though total revenue of RIL had increased by 2.7 times, the revenue paid to government increased by 1.9 times only.
The government audit observed that RIL was paying to the government hardly 1.7 per cent of its turnover as revenue (2008-09), which has now dipped to as low as 1.2 per cent of its turnover (2013-14).
Loan to IMT
In 2011-12, RIL raised secured/unsecured loans of ₹57,854 crore, mainly though ECBs. During the relevant period, RIL extended interest-free loan of ₹6,615 crore to Reliance Industrial Investment and Holdings Ltd (RIIHL), which in turn gave an interest-free loan to Independent Media Trust (IMT) to make business investment.
However, IMT did not file online return for 2012-13 to 2014-15, stating there was no taxable income.
The government audit shows that IMT was used as investment vehicle in a circuitous way to acquire media house of which RIL is the ultimate beneficiary. Thus, by not filing return under the pretext of nil income, it escaped from scrutiny under CASS (computer-aided scrutiny selection) norms. Hence, it becomes apparent that RIL had diverted interest-bearing funds for non-business purpose to reduce its tax liability by bearing substantial finance cost including exchange loss.
KG-D6 oil field
In its conclusion, the audit department said that the scrutiny assessment loses sight of important issues which have a bearing on determination of taxable income and that the department should re-think its present strategy of scrutiny assessment which is not yielding any significant additional revenue.