Deffered Tax a Corporate Advantage

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DEFERRED TAX A CORPORATE ADVANTAGE

(A study on deferred tax component in various companies and its effect)

A Dissertation Submitted in partial fulfillment of the requirements for the award of

MBA Degree of Bangalore University

By

Mr. Mahesh B S

Reg. No: 06XQCM6096

Under the guidance and supervision

Of

Prof. SATHYANARAYAN

Professor, MPBIM

M.P.Birla Institute of Management

Associate Bharatiya Vidya Bhavan

#43, Race Course Road,

Bangalore- 560 001

2006-08



M. P. Birla Institute of Management

ASSOCIATE BHARATIYA VIDYA BHAVAN

#43, RACE COURSE ROAD, BANGALORE -560001, INDIA

DECLARATION

I hereby declare that this report titled “Deferred Tax a Corporate

Advantage”( A study on deferred tax component in various Companies

and its effect) carried out by me under the guidance and supervision of

Prof. SATHYANARAYAN, M P Birla Institute of Management

Bangalore, towards the partial fulfillment of MBA course of Bangalore

University at M. P. Birla Institute of Management. This has not been

submitted in part or fulfillment towards any other degree or diploma.

Place: Bangalore MR. MAHESH B S

Date: 30

th

April, 2008 Register Number: 06XQCM6096



PRINCIPAL’S CERTIFICATE

This is to certify that the research study on “Deferred Tax a

Corporate Advantage”( A study on deferred tax component in various

Companies and its effect) has been prepared by Mr. Mahesh B S bearing

the registration no. 06XQCM6096 under the guidance and supervision of

Prof. SATHYANARAYAN Professor, M.P.Birla Institute of Management

(Associate Bharatiya Vidya Bhavan), Bangalore

Place: Bangalore Dr. N. S. Malavalli

Date: 30th April, 2008 (Principal)





ACKNOWLEDGEMENT

I would like to express my sincere gratitude to my research guide

Prof SATHYANARAYAN, Professor M P Birla Institute of Management,

Bangalore, for his consistent encouragement and guidance in the course of

the research investigation.

Further, I would like to thank Dr. N. S. Malavalli for providing all the

necessary assistance in carrying out the project. I gained a lot of

knowledge throughout the course of carrying the project.

I would also like to sincerely thank my friends who have helped me in

completing this project by providing me with the academic support.

Mr. MAHESH B S



CONTENTS

Declaration (i)

Certificates (ii)

Acknowledgement (iii)

List of tables and graphs (iv)

Executive summary………………………………………………………..01

Chapter 1: Introduction……………………………………………………02

Need and Importance of Study……………………………………………......12

Objective of the research………………………………………………………13

Chapter 2: Literature review..………………………………………........09

Chapter 3: Research methodology……………………….……………..15

Chapter 4: Data analysis and inferences……………………………….18

Study on effect of Deferred Tax Liability on Net Working Capital……...….31

Study on Large Tax Deferring Firms………………………………………….47

Study on effect of reinvestment of depn. amount on asset & time value...50

Chapter 8: Summary of Research Findings……………………………53

Chapter 9: Conclusion……………………………………………………55

Chapter 10: Bibliography…………………………………………………56



LIST OF GRAPHS

Sl No. PARTICULARS Page No.

01 Graph showing NDT of sample companies Industry wise 2002 Graph showing DTL of sample companies Industry wise 2503 Graph showing DTA of sample companies Industry wise 2804 Graph showing amount DTA as DTL 2905 Graph showing DTA as a percentage of DTL 3006 Graph showing NWC of sample companies industry wise 3207 Graph showing net effect on WC due to DT 34

08 Graph showing CA of sample companies industry wise 3709 Graph showing component of DTA in CA 3810 Graph showing percentage of DTA in CA 3911 Graph showing CL of sample companies industry wise 4112 Graph showing DTL in CL 4213 Graph showing percentage of DTL in CL 4314 Graph showing DTL as part of CL 45

15 Graph showing percentage of DTL as part of TL 46

16 Graph showing DTL comparison between public & private

companies48



List of Tables

Sl No. PARTICULARSPage

No.

01 The sample companies are listed below 1602 Table of Net Deferred Tax of The Sample Companies 1903 Table of NDT of sample companies Industry wise 2004 Average composition of deferred tax total DTL 2205 Table of DT liability of sample companies 2406 Table of DTL of sample companies Industry wise 2507 DTA of sample companies 2708 DTA of sample companies Industry wise 2809 Table of NWC of sample companies 3110 Table of NWC of sample companies industry wise 3211 Table of NWC of sample companies without deferred tax 3312 Table of percentage difference between NWC of sample

companies industry wise without deferred tax component 3313 Table of CA of sample companies including DT 3614 Table of CA of sample companies industry wise including DT 3715 Table of DTA as a percentage of CA of companies 3816 Table of CL of sample companies including DT 40

17Table of CL of sample companies including DT Industry wise

4118 Table of DTL as a percentage of CA of companies 4219 Table of DTL as a percentage of TL of companies 4420 Table of DTL as a percentage of TL of companies Industry

wise 4521 Large tax Deferring firms 4722 Large Tax deferring firms under public companies 4723 Large Tax deferring firms under private companies 4824 Present value of DT (reinvestment equal to book Depn.) 51



Deferred Tax a Corporate Advantage

ABSTRACT

Tax laws in several countries, including those in India allow firms to

leverage certain provisions of income tax to defer tax liability to the future.

Though Indian companies have been exploiting this facility for a long time,

the information on the deferred tax system was not available to the public

until 2000. In 2001, Accounting Standard-22 (AS-22) came in force, which

required all companies to disclose any tax deferred. Governments are

offering this facility and bearing the cost since it helps to create fresh

investments in the economy and hence contributes to overall economic

growth. This scenario puts the companies concerned in a very advantageous

situation, and as such, should ultimately reflect on the value of the firm if the

benefits are really large and significant.

In this study we have examined the tax deferred by the BSE Sensex

and NSE Nifty companies for the period of five years i.e. 2003 to 2007 to

understand the impact the deferred tax has on their value.

The study has revealed various interesting facts related to the benefits

reaped by these companies and hoe it affects the financial position of these

companies.

Above all, the study was very informational and enriching experience.

M P Birla Institute of Management 1




INTRODUCTION

TAXATION HISTORY

The history of taxation dates back to time immemorial and it is not a recent development

by any account. A thorough research on the history of taxation system shows that taxes

were levied on either on the sale and purchase of merchandise or livestock.

Further, the history of taxation suggests that the process of levying and the manner of tax

collection were unorganized. But it suggests that all historical leaders and head

countrymen collected taxes to run its authority. In other words taxes on income, sale,

purchase and properties were collected to run the ruling Government machineries.

Further, these taxes were collected to meet their military and civil expenditure and also to

meet the common needs of the subjects like maintenance of roads, drainage system,

government buildings, administration of justice and other functions of the region. day

India tax machinery is very much based on that laid down foundation.

Although, there were no homogeneous tax rate structures but it depended on the

production capacity and commodity of that particular country and/or region. Moreover,

the tax rates and quantum varied according to the annual production. These taxes were

collected in cash or in kind and it entirely depended on the type of commodity or service

on which it was levied upon. For example, there was a very common practice of selling

food crops and cash crops to government machineries against no money. The history of

taxation suggests these were done to store government buffer stocks to meet emergencies.

Taxes were levied on all classes of citizens, like actors, dancers, singers and even dancing

girls. Taxes were paid in the form of gold-coins, cattle, grains, raw-materials and even by

rendering.personal.service.

In India, the tradition of taxation has been in force from ancient times. It finds its

references in many ancient books like 'Manu Smriti' and 'Arthasastra'. There was a

perfect admixture of direct taxes with indirect taxes and they were varied in nature.





India's history of taxation suggests existence of a large and composite taxable population.

With the advent of the moguls in India the country witnessed a sea of change in the

taxation system of India. Although, they also practiced the same norm of taxation but it

was more homogeneous in structure and collection. The period of British rule in India

witnessed some remarkable change in the whole taxation system of India. Although, it

was highly in favor of the British government and its exchequer but it incorporated

modern and scientific method of taxation tools and systems. In 1922, the country

witnessed a paradigm shift in the overall Indian taxation system. Setting up of

administrative system and taxation system was first done in the history of taxation system

in India. The period thereafter witnessed rapid growth and modernization of the Indian

taxation system and the present





INTRODUCTION TO DEFERRED TAX THE term "deferred tax" may sound ominous enough to put off all but the most

ardent of number-crunchers... but it is not rocket science. When a company arrives at its

profits or losses for a period, it does so after deducting all the expenses, including the tax

for the period, from the revenues earned. But a company's profits/losses reported to

investors often differ, sometimes substantially, from the profits the taxman lays claim to.

There may be a difference in the way certain items of expense are allowed to be treated

for tax purposes and how a company actually treats them. Tax laws may allow a company

to deduct certain expenses in full in a single year, but it may phase out the charge over a

number of years.

Tax laws may allow a company to deduct certain expense in full in a single year,

but it may phase out the charge over a number of years. Pre-issue expenses or expenses

on R&D or expenses incurred on mergers, may be allowed to be written off over a fixed

number of years by tax laws. But the company may stretch the write-off over a longer

period.

Research on the economics of corporate taxation has historically ignored the

financial accounting rules that link tax liabilities and payments to reported earnings. In

contrast, accounting researchers have long recognized the potential impact of accounting

rules not only on reported earnings but also on other aspects of firm behavior.

This study examines deferred tax assets (DTAs) and deferred tax liabilities (DTLs)

that are created by temporary differences between book and tax accounting provisions. It

presents information on the aggregate value of both DTAs and DTLs, as well as on theeffect of statutory corporate tax rate changes on these balance sheet items and on net

earnings. Deferred tax positions are likely to become more prevalent and to increase in

magnitude as GAAP & other Accounting Apex bodies increase its reliance on fair-value

accounting over transaction-driven cash-basis accounting.





Sources of Deferred Tax Liability

The concept of deferred tax is notional. The tax law does not allow specifically

anyone to defer the tax. It simply provides a methodology for computing taxable income

and then the tax on taxable income. Deferred tax arises if some of the tax provisions are

liberal in allowing expenditure more than expenditure normally shown in computing

profit for a period. Chambers (1968) points out that because of the mixing of fiscal and

policy functions in an income tax law, the amount of taxable income of any taxpayer

need not be the same as the amount of pre-tax income calculated by applying the

prevailing rules of accounting. Accounting regulations require the difference to be

recorded in the balance sheet either as future tax liability or tax asset. A number of

authors argue the need for considering the time value of the tax liability to reflect the true

value of the liability and additional cash flow that is generated on account of deferring

the tax liability. Guenther and Sansing (2004) also proved that the value of deferred tax

liability depends on tax depreciation rate and discount factor.

Temporary Differences between Book and Tax Earnings

A firm’s total tax expense, an accounting concept, equals its statutory corporate tax rate

times its taxable book income. Taxable book income, which corresponds to income

earned today that will be taxed at some point in time, equals pre-tax book income less

permanent differences between book and tax income. Permanent differences arise when

accounting rules and tax rules treat components of income or expenses in different ways.

Examples of permanent differences are the treatment of tax-free incomes, which is not

included in taxable income but is included in book income, and the reporting of fines and

penalties, which are not are deductible for tax purposes but are deductible in computing

book earnings. Permanent book-tax differences do not generate deferred tax assets or

liabilities; their impact on the firm’s accounting earnings is fully reflected when they

accrue.





Temporary book-tax differences arise when accounting rules and tax rules differ on when

a component of income is recognized. Accounting standards attempt to match effort with

accomplishment and so accrue expenses incurred but not yet paid. The tax code, which

tries to limit the number of assumptions used to compute taxable income, more closely

matches cash-basis accounting for expenses. Current tax expense is an estimate of the

firm’s taxes to be reported on its current year tax returns. Temporary book-tax differences

generate disparities between a firm’s current tax expense and its total tax expense. These

disparities are deferred tax expenses. Provided tax rates are constant through time

(1) Deferred Tax Expense = Tax Rate*Temporary Differences

= Total Tax Expense – Current Tax Expense.

Temporary differences can arise from many sources, such as differences between

depreciation schedules for book and tax purposes, differences in accounting and tax rules

governing the accrual of expenses for retiree health benefits, and differences in the book

and tax treatment of leases.

Equation

(1) Does not hold when there are tax rate changes, which require deferred tax

revaluations. Deferred tax assets and liabilities are defined as the current corporate tax

rate times the historical sum of the firm’s temporary differences:

(2) Deferred Tax Liability = Tax Rate*(Σ Temporary Differences).

A firm with a positive sum of temporary differences, one for which the cumulated

total tax expense exceeds the cumulated current tax expense, has a deferred tax liability

(DTL). Such a firm owes future taxes, it has not yet paid taxes on income that has been

booked for accounting purposes.





Firms for which taxable income has exceeded book income will, in contrast, have

a deferred tax asset (DTA), they are owed future tax relief. They have already paid taxes

on income that has not yet been reported for accounting purposes. A firm with a net

operating loss carry -forward would have a DTA.





Accounting for Taxes on Income in the context of Section 115JB,

of the Income-tax Act, 1961

Accounting Standard (AS) 22, Accounting for Taxes on Income

AS 22 is applied in a situation where a company pays tax under section 115JB

(commonly referred to as Minimum Alternative Tax) of the Income-tax Act, 1961

Another issue is how deferred tax is measured on the timing differences

originating during the current year if the enterprise expects that these differences would

reverse in a period in which it may pay tax under section 115JB of the Act.

The payment of tax under section 115JB of the Act is a current tax for the period.

In a period in which a company pays tax under section 115JB of the Act, the deferred tax

assets and liabilities in respect of timing differences arising during the period, tax effect

of which is required to be recognized under AS 22, should be measured using the regular

tax rates and not the tax rate under section 115JB of the Act.

In case an enterprise expects that the timing differences arising in the current

period would reverse in a period in which it may pay tax under section 115JB of the Act,

the deferred tax assets and liabilities in respect, Published in ‘The Chartered Accountant’,

December 2002, pp. 611-612. The authority of this ASI is the same as that of the

Accounting Standard to which it relates. The contents of this ASI are intended for the

limited purpose of the Accounting Standard to which it relates. ASI is intended to apply

only to material items of timing differences arising during the current period, tax effect of

which is required to be recognized under AS 22, should be measured using the regular

tax rates and not the tax rate under section 115JB of the Act.





Sub-section (1) of Section 115JB of the Act provides that “Notwithstanding

anything contained in any other provision of this Act, where in the case of an assessee,

being a company, the income-tax, payable on the total income as computed under this

Act in respect of any previous year relevant to the assessment year commencing on or

after the 1st day of April, 2001, is less than seven and one-half per cent of its book profit,

such book profit shall be deemed to be the total income of the assessee and the tax

payable by the assessee on such total income shall be the amount of income tax at the rate

of seven and one-half per cent.” Tax paid/payable under section 115JB is the current tax

and does not, in itself, give rise to any deferred tax since this payment of tax is pursuant

to the special provision of the Act. This section only prescribes the mode of computation

of tax payable for the current year.

Paragraph 20 of AS 22 requires that current tax should be measured at the amount

expected to be paid to (recovered from) the taxation authorities, using the applicable tax

rates and tax laws. Paragraph 21 of AS 22 provides that deferred tax assets and liabilities

should be measured using the tax rates and tax laws that have been enacted or

substantively enacted by the balance sheet date. In a period in which an enterprise pays

tax under section 115JB of the Act, the rate of seven and one-half percent is relevant for

the purpose of measurement of current tax and not for the purpose of measurement of

deferred tax.

There are two methods for recognition and measurement of tax effects of timing

differences, viz., the “full provision method” and “partial provision method”. Under the

“full provision method”, the deferred tax is recognized and measured in respect of all

timing differences(subject to consideration of prudence in case of deferred tax assets)

without considering assumptions regarding future profitability, future capital expenditure

etc. On the other hand, the ‘partial provision method’ excludes the tax effects of certain

timing differences which will not reverse for some considerable period ahead. Thus, this

method is based on many subjective judgments involving assumptions regarding future

profitability, future capital expenditure etc. In other words, partial provision method is





based on an assessment of what would be the position in future. Keeping in view the

elements of subjectivity, the ‘partial provision method’ under which deferred tax is

recognized on the basis of assessment as to what would be the expected position, has

generally been discarded the world-over. AS 22 also does not consider the above

assumptions and, therefore, is based on ‘full provision method’. The expectation that the

timing differences arising in the current period would reverse in a period in which the

enterprise may pay tax under section 115JB of the Act, also involves assessment of the

future taxable income and accounting income and therefore, is considerably subjective. It

can not be known beforehand, with a reasonable degree of certainty, whether in future an

enterprise would pay tax under section 115JB of the Act because that determination can

only be made after the fact.

Recognition and measurement of deferred tax using the rate under section 115JB

of the Act, i.e., seven and one-half percent, on the basis of an assessment that the timing

differences would reverse in a period in which the enterprise may pay tax under section

115JB of the Act, would be a situation analogous to the adoption of the ‘partial provision

method ’which has already been rejected.

In view of the above, this Interpretation requires that even if an enterprise expects

that the timing differences arising in the current period would reverse in a period in

which it may pay tax under section 115JB of the Act, the deferred tax assets and

liabilities in respect of timing differences arising during the current period, tax effect of

which is required to be recognized under AS22, should be measured using the regular tax

rates and not the tax rate under section 115JB of the Act.

The provisions of Minimum Alternate Tax (‘MAT’) were introduced under the

Income-tax Act, 1961 (‘the Act’) from Assessment Year 1988-89. This scheme was

withdrawn from Assessment Year 1991-92 and again reintroduced from Assessment Year

1997-98. It originally levied tax on 30% of the book profits but has since been amended

from time to time. The intention is to tax zero tax companies on the basis of book profits.





Presently, under the MAT provisions the companies are taxed @ 10 percent (plus

applicable surcharge and education cess) on the book profits. However, the Legislature

also has clearly intended to extend certain tax benefits (for e.g. 80HHC, 10A, 10B, etc.)

to the companies who are liable to MAT. These provisions have been enacted in different

forms from time to time which lead to different interpretations.





Need and Importance of Study

Need for study of the topic is very essential as this area is hardly studied

and id complicated and has a major impact on both corporate as well as State, astax structure is very complex in India.

With respect to Deferred Tax, when it comes to certain items the tax

liability can be deferred to certain future period. Due to this the corporate can

utilize the amount of liability for short term needs of funds; hence it can be used as

a effective short-term source of funds.

This continuous deferring of liability is possible due to the weak collection

mechanism on the other side i.e. State.

In order to strike a balance between these two extremes i.e. speeding up of

collection and deferring of payment, an effective administrative mechanism should

be developed.

In order to assess and to give a new dimension to concept of deferred Tax

the following study entitled “Deferred Tax a Corporate Advantage” (A study on

Deferred Tax component in various Companies and its effect) is conducted.





Objective of the research

The objective of the study is

• Study the effect of deferred tax on Current Assets and Current Liabilities.

• Study the effect of deferred tax on Net Working Capital.

• Study the effect of deferred tax on Alternative Source of Capital.

• Study the benefit of deferred tax reaped by private and public sector.





Review of Literature

A through literature review is done to find out the previous study conducted

on the topic it is seen that there are very few studies conducted on this topic byIndian researchers. Where as it has been taken very serious topic for research

study and a lot of study done by the international researchers of other states.

The various research articles referred for this study are:

• Impact of Deferred Tax Facility on Firm Value,

Author - B. V. Harisha, (Academic Intern, Finance and Control Area, Indian Institute of Management)

• The Significance and Composition of Deferred Tax Assets and Liabilities Author- James Poterba, (MIT and NBER)

• The Divergence Between Book and Tax Income

Author - Mihir A. Desai (Harvard University and NBER)

• Valuation Relevance of Reversing Deferred Tax Liabilities

Author - Richard C. Sensing, David A. Guenther

Various articles and literature from internet and other journals have referred to

collect the data for the study and to update on the latest changes in the provisions.





Methodology

Type of Research

This research study is considered as an analytical and historical study. The

research require s various data to facilitate and provide validity to the research study for

this propose only secondary sources have been tapped such as internet and Financial

Database such as Capitaline.com and various published articles.

Sampling Technique

Sampling technique used for the research is Convenient sampling. The samples

drawn for the study are based on the convenience for the applicability of the research to

representative groups of the samples.





Sample Size

Sample consists of thirty one companies listed in NSE Nifty index and BSE

Sensex index which have the deferred tax component.

The sample companies are listed below

IndustryGroup SI.no. Companies

1 1 ACC Ltd

1 2 Ambuja Cements Ltd

1 3 Larsen & Toubro Ltd

2 4 Bharat Petroleum Corporation Ltd

2 5 Oil & Natural Gas Corpn Ltd

3 6 Bharti Airtel Ltd

4 7 DLF Ltd4 8 Unitech Ltd

5 9 Dr Reddys Laboratories Ltd

5 10 Ranbaxy Laboratories Ltd

5 11 Sun Pharmaceuticals Industries Ltd

6 12 Grasim Industries Ltd

7 13 Hindalco Industries Ltd

7 14 Steel Authority of India Ltd

7 15 Sterlite Industries (India) Ltd

7 16 Tata Steel Ltd

8 17 Hindustan Unilever Ltd

8 18 ITC Ltd9 19 Housing Development Finance Corporation Ltd

9 20 ICICI Bank Ltd

9 21 Punjab National Bank

9 22 State Bank of India

10 23 Infosys Technologies Ltd

10 24 Satyam Computer Services Ltd

10 25 Tata Consultancy Services Ltd

10 26 Wipro Ltd

11 27 Mahindra & Mahindra Ltd

11 28 Tata Motors Ltd

12 29 Tata Power Company Ltd

13 30 Reliance Industries Ltd

14 31 Zee Entertainment Enterprises Ltd





The data relating to deferred tax and other financial data has been accumulated for

the research purpose and the tables have created accordingly for the analysis of the data.

Sample Construction

Data is collected from the Sensex and Nifty listed companies for five years. This

sample includes both financial and non-financial firms. Since we are interested in

tracking DTAs and DTLs over time, we use the annual financial statements data.

Data Limitations

The data is limited to the BSE Sensex and NSE Nifty companies which have the

deferred tax component in there financial statements. The data is limited to five financial

years. The sample is drawn on this basis. The particulars of deferred tax source in detail

is not available hence we have to generalize the composition to all the sample companies

based on the literature survey done and the study conducted by the other researchers. The

data is limited to the published data available in the public sources.





INTRODUCTION TO ANALYSIS AND INTERPRETATION

Tax laws in several countries, including those in India allow firms to leveragecertain provisions of income tax to defer tax liability to the future. Though Indian

companies have been exploiting this facility for a long time, the information on the

deferred tax system was not available to the public until 2000. In 2001, Accounting

Standard-22 (AS-22) came in force, which required all companies to disclose any tax

deferred. Governments are offering this facility and bearing the cost since it helps to

create fresh investments in the economy and hence contributes to overall economic

growth. This scenario puts the companies concerned in a very advantageous situation,

and as such, should ultimately reflect on the value of the firm if the benefits are really

large and significant. In this study we examined the tax deferred by the BSE Sensex &

NSE Nifty companies as on year ended 2003 to year ended 2007 to understand the impact

the deferred tax has on their value.





Table of Net Deferred Tax of the Sample Companies

Net Deferred Tax

SINo. Companies 2007 2006 2005 2004 2003

1 ACC Ltd (338.02) (326.42) (304.94) (311.41) (288.37)

2 Ambuja Cements Ltd (378.38) (383.86) (381.14) (320.89) (233.64)

3 Larsen & Toubro Ltd (107.41) (126.75) (137.58) (213.51) (913.04)

4 Bharat Petroleum Corporation Ltd (1762.54) (1768.64) (1669.73) (1444.17) (1226.85)

5 Oil & Natural Gas Corpn Ltd (8111.86) (7163.31) (5789.39) (5424.98) (4711.58)

6 Bharti Airtel Ltd (238.72) (194.84) (101.10) 243.80 105.93

7 DLF Ltd (18.70) (9.20) (96.20) (119.50) (134.90)

8 Unitech Ltd (2.04) (15.08) (12.08) (12.18) (13.08)

9 Dr Reddys Laboratories Ltd (96.70) (75.49) (20.86) (39.11) (38.96)

10 Ranbaxy Laboratories Ltd (65.48) (0.10) (107.18) (94.30) (84.08)

11 Sun Pharmaceuticals Industries Ltd (89.51) (105.27) (89.60) (74.06) (32.88)

12 Grasim Industries Ltd (1152.56) (1158.28) (1179.29) (602.20) (591.54)

13 Hindalco Industries Ltd (1171.46) (1228.14) (1134.24) (1195.26) (1025.87)

14 Steel Authority of India Ltd (1416.83) (1497.42) (1862.70) (15.65) (8.58)

15 Sterlite Industries (India) Ltd (917.40) (751.07) (509.75) (461.75) (538.01)

16 Tata Steel Ltd (785.94) (992.18) (851.29) (851.96) (859.53)

17 Hindustan Unilever Ltd 214.35 227.24 209.56 227.08 266.39

18 ITC Ltd (471.27) (325.50) (376.15) (114.50) (90.08)

19 Housing Development Finance Corporation Ltd 132.87 83.40 69.83 54.02 62.57

20 ICICI Bank Ltd 765.91 246.79 70.22 462.88 506.39

21 Punjab National Bank 94.84 (28.23) 146.13 117.74 71.06

22 State Bank of India (238.09) 298.13 804.67 499.18 70.78

23 Infosys Technologies Ltd 119.00 92.00 65.00 45.00 39.97

24 Satyam Computer Services Ltd 87.18 43.67 4.62 10.71 5.29

25 Tata Consultancy Services Ltd (33.03) 0.74 (23.57) (66.00) (7.78)

26 Wipro Ltd 59.00 59.40 49.50 48.63 46.59

27 Mahindra & Mahindra Ltd 14.71 (115.66) (135.34) (148.48) (139.69)

28 Tata Motors Ltd (817.27) (676.79) (620.54) (533.70) (100.98)

29 Tata Power Company Ltd (45.82) (33.62) (43.96) 17.66 21.22

30 Reliance Industries Ltd (6990.53) (4970.82) (4266.82) (3474.84) (2684.88)

31 Zee Entertainment Enterprises Ltd 7.54 14.80 21.92 (1.07) (6.90)





Table of Net Deferred Tax of the Sample Companies

Industry wise

Industry 2007 2006 2005 2004 2003

1 Infrastructure & Cement (823.81) (837.03) (823.66) (845.81) (1435.05)

2 Petroleum (9874.40) (8931.95) (7459.12) (6869.15) (5938.43)

3 Telecommunications (238.72) (194.84) (101.10) 243.80 105.93

4 Reality (20.74) (24.28) (108.28) (131.68) (147.98)

5 Pharmaceuticals (251.69) (180.86) (217.64) (207.47) (155.92)

6 Textiles (1152.56) (1158.28) (1179.29) (602.20) (591.54)

7 Iron & Steel (4291.63) (4468.81) (4357.98) (2524.62) (2431.99)

8 FMCG (256.92) (98.26) (166.59) 112.58 176.31

9 Banking 755.53 600.09 1090.85 1133.82 710.80

10 Information Technology 232.15 195.81 95.55 38.34 84.07

11 Automobiles (802.56) (792.45) (755.88) (682.18) (240.67)

12 Energy & Power (45.82) (33.62) (43.96) 17.66 21.22

13 Diversified (6990.53) (4970.82) (4266.82) (3474.84) (2684.88)

14 Media & Entertainments 7.54 14.80 21.92 (1.07) (6.90)

0.00

5000.00

2007 2006 2005 2004 2003 Media & Entertainments

Diversified

(30000.00)

(25000.00)

(20000.00)

(15000.00)

(10000.00)

(5000.00)Enery & Power

Automobiles

Information Tecnology

Banking

FMCG

Iron & Steel

Textiles

Phamaceuticals

Reality

Telecomunication

Petroleum

Infrastructure & Cement





Interpretation and Analysis

The above table gives you the clear picture of the Net deferred tax in the various

sample companies and the next table is a summary of the companies industry wise, it is

evident from the above table that the major quantum of the deferred tax has come from the

manufacturing sectors like Petroleum, Iron and Steel, Textile and Automobiles.

The major contribution is from Petroleum sector which comes up to 5938.43Crs in

2003, 6869.15Crs in 2004, 7459.12Crs in 2005, 8931.95Crs in 2006 and 9874.40Crs in

2007, followed by Iron and Steel sector contributing up to 2431.99Crs in 2003, 2524.62Crs

in 2004, 4357.98Crs in 2005, 4468.81Crs in 2006 and 4291.63Crs in 2007 another major

contributor is Reliance industry which is considered as diversified sector, also has a major

contribution which amounts to 2684.88Crs in 2003, 3474.84Crs in 2004, 4266.82Crs in

2005, 4970.82Crs in 2006 and 6990.53Crs in 2007. These sectors have a major part of

deferred tax to their credit.

We also have other sectors like Telecommunication, Reality, FMCG,

Pharmaceuticals and Energy and Power who also have contributed to the total deferred tax

but not to the extent of other sectors.

Other major contributors are Infrastructure and Cement industry, Textile and

Automobile industry that also have a decent amount of deferred tax to their share.

On the other hand we have three industries with deferred tax assets which are

Banking, Information Technology and Media and Entertainment sectors. All these sectors

have contributed to the reduction of Total Deferred Tax liability to the overall economy.





Composition of Deferred Tax

There are several expenditure items, which provide such differences and a dominant

source is the treatment of depreciation under the books of accounts and tax laws. In general,

when any capital expenditure incurred by a firm is charged against revenue over the years,

it offers a source of difference if there are differences in the quantum of expenditure

charged against revenue under the books of accounts and tax purpose. Often, tax laws, in

order to maintain uniformity and simplicity, allow a conservative but uniform rate at which

the capital expenditure has to be charged against revenue whereas firms apply a different

and lower rate based on the actual benefit derived from the assets. An analysis of sources of

deferred tax liability shows a number of such sources, and among them, depreciation is adominant mode of deferring tax.

Average Composition of Deferred Tax Total Deferred Tax Liability

SI.No. Sources of Deferred Tax Percentage

1 Depreciation 94.75%

2 Fiscal allowance on Fixed Assets 2.15%

3 Interest Accrued 0.67%

4 Lease Adjustments 0.58%

5 Deferred Revenue 0.44%

6 Product Development Cost 0.17%

7 Others unspecified 1.24%

Total 100.00%





The above table shows the sources of deferred tax of sample companies that used

such sources, and the quantum of deferred tax attributed for the source. Among the sources,

differences in depreciation between the books of accounts and tax books account for

94.75% of the total deferred tax liability of sample companies’

The next source of deferred tax is fiscal allowances of fixed assets, which accounts

for 2.15%, followed by interest accrued but not considered as income for tax purposes

(0.67%). Though, there are few other sources that have been used by these companies for

deferring the taxes, their importance both in terms of amount deferred and the number of

companies using such sources is very low.





Table of Deferred Tax Liability of the Sample Companies

Deferred Tax LiabilityIndyGrp

SIno. Companies 2007 2006 2005 2004 2003

1 1 ACC Ltd 446.51 438.11 402.88 379.61 349.14

1 2 Ambuja Cements Ltd 406.16 396.15 387.79 452.1 345.19

1 3 Larsen & Toubro Ltd 274.7 259.95 261.91 353.47 1053.58

2 4 Bharat Petroleum Corporation Ltd 2068.2 1999 1838.54 1715.98 1568.27

2 5 Oil & Natural Gas Corpn Ltd 13482.1 11995.2 9653.28 9931.81 7479.14

3 6 Bharti Airtel Ltd 403.52 282.57 271.32 10.11 289.79

4 7 DLF Ltd 18.7 9.2 96.2 119.5 134.9

4 8 Unitech Ltd 2.04 15.08 12.08 12.18 16.46

5 9 Dr Reddys Laboratories Ltd 106.21 78.15 21.82 43.03 43.21

5 10 Ranbaxy Laboratories Ltd 255.45 269.93 190.85 148.85 134.04

5 11 Sun Pharmaceuticals Industries Ltd 118.81 113.96 92.32 77.9 33.226 12 Grasim Industries Ltd 1215.3 1213.45 1245.37 705.04 626.5

7 13 Hindalco Industries Ltd 1495.43 1536.57 1164.64 1198.93 1025.87

7 14 Steel Authority of India Ltd 1416.83 1497.42 1862.7 15.65 8.58

7 15 Sterlite Industries (India) Ltd 968.57 890.1 583.17 574.01 575.55

7 16 Tata Steel Ltd 1775.13 1771.49 1651.38 1712.88 1700.64

8 17 Hindustan Unilever Ltd 195.14 164.13 128.72 147.71 115.57

8 18 ITC Ltd 738.79 560.13 595.71 662.28 515.03

9 19 Housing Development Finance Corporation Ltd 61.39 62.34 0.8 2.03 4.26

9 20 ICICI Bank Ltd 657.49 670.97 0 929.01 951.69

9 21 Punjab National Bank 107.08 113.3 27.99 42.04 59.86

9 22 State Bank of India 1343.74 430.39 449.7 460.77 74.8210 23 Infosys Technologies Ltd 0 0 0 0 0

10 24 Satyam Computer Services Ltd 5.65 24.13 25.38 12.87 10.76

10 25 Tata Consultancy Services Ltd 140.22 81.88 71.58 80.79 7.78

10 26 Wipro Ltd 13.2 6.4 2.71 0 0

11 27 Mahindra & Mahindra Ltd 292.12 233.89 258.87 260.33 270.31

11 28 Tata Motors Ltd 1079.45 880.46 771.65 751.73 716.45

12 29 Tata Power Company Ltd 120.34 107.4 99.64 75.43 55.07

13 30 Reliance Industries Ltd 7304.09 5092.52 4633.8 3811.43 2684.88

14 31 Zee Entertainment Enterprises Ltd 15.14 23.71 24.42 34.1 33.55





Table of Deferred Tax Liability of the Sample Companies

Industry wise

SI. No. Industry 2007 2006 2005 2004 2003

1 Infrastructure & Cement 1127.37 1094.21 1052.58 1185.18 1747.91

2 Petroleum 15550.3 13994.2 11491.8 11647.8 9047.41

3 Telecommunication 403.52 282.57 271.32 10.11 289.79

4 Reality 20.74 24.28 108.28 131.68 151.36

5 Pharmaceuticals 480.47 462.04 304.99 269.78 210.47

6 Textiles 1215.3 1213.45 1245.37 705.04 626.5

7 Iron & Steel 5655.96 5695.58 5261.89 3501.47 3310.64

8 FMCG 933.93 724.26 724.43 809.99 630.6

9 Banking 2169.7 1277 478.49 1433.85 1090.63


11 Automobiles 1371.57 1114.35 1030.52 1012.06 986.76

12 Energy & Power 120.34 107.4 99.64 75.43 55.07

13 Diversified 7304.09 5092.52 4633.8 3811.43 2684.88

14 Media & Entertainments 15.14 23.71 24.42 34.1 33.55

Years 2007 2006 2005 2004 2003

Total DTL 38534.5 33224 28832.2 26725.6 22887.1

0

5000

10000

15000

20000

25000

30000

35000

40000

2007 2006 2005 2004 2003

Media & Entertainments

Diversified

Enery & Power

Automobiles

Information Tecnology

Banking

FMCG

Iron & Steel

Textiles

Phamaceuticals

Reality

Telecomunication

Petroleum

Infrastructure & Cement






The above table gives information about the total deferred tax liability in the

various sample companies and the next table is a summary of the companies industry wise.

Again it is evident from the above table that the major quantum of the deferred tax liability

has come from the manufacturing sectors like Petroleum, Iron and Steel, Textile and

Automobiles.

The major contribution is from Petroleum sector which comes up to 9047.41Crs in

2003, 11647.8Crs in 2004, 11491.8Crs in 2005, 13994.2Crs in 2006 and 15550.3Crs in

2007, followed by Iron and Steel sector contributing up to 3310.64Crs in 2003, 3501.47Crs

in 2004, 5261.89Crs in 2005, 5695.58Crs in 2006 and 5655.96Crs in 2007. Another major

contributor is Reliance industry which is considered as diversified sector. It has a major

contribution which amounts to 2684.88Crs in 2003, 3811.43Crs in 2004, 4633.8Crs in

2005, 5092.52Crs in 2006 and 7304.09Crs in 2007. These sectors have a major part of

deferred tax liability to their credit.

Other major contributors are Infrastructure and cement industry, Textile and

Automobile industry that also have a decent amount of deferred tax to their share.

Apart from the above sectors, other sectors like Telecommunication, Realty, FMCG,

Pharmaceuticals, Energy and Power have also contributed to the total deferred tax but notto the extent of above sectors.

The Total Deferred Tax Liability has increased considerably in the last five years

from 22887.1Crs in 2003 to 38534.5Crs in 2007.

The total increase in deferred tax liability from 2003 to 2007 is a radical 68.37%

with an average growth of 14% approximately every year.

It is very clear that the corporates are using this provision to a maximum extent to

reap the benefit.





Table of Deferred Tax Assets of the Sample Companies

Deferred Tax Assets

Ind

Group SI.no. Companies 2007 2006 2005 2004 20031 1 ACC Ltd 108.49 111.69 97.94 68.2 60.77

1 2 Ambuja Cements Ltd 27.78 12.29 6.65 131.21 111.55

1 3 Larsen & Toubro Ltd 167.29 133.2 124.33 139.96 140.54

2 4 Bharat Petroleum Corporation Ltd 305.66 230.36 168.81 271.81 341.42

2 5 Oil & Natural Gas Corpn Ltd 5370.27 4831.92 3863.89 4506.83 2767.56

3 6 Bharti Airtel Ltd 164.8 87.73 170.22 253.91 395.72

4 7 DLF Ltd 0 0 0 0 0

4 8 Unitech Ltd 0 0 0 0 3.38

5 9 Dr Reddys Laboratories Ltd 9.51 2.66 0.96 3.92 4.25

5 10 Ranbaxy Laboratories Ltd 189.97 269.83 83.67 54.55 49.96

5 11 Sun Pharmaceuticals Industries Ltd 29.3 8.69 2.72 3.84 0.346 12 Grasim Industries Ltd 62.74 55.17 66.08 102.84 34.96

7 13 Hindalco Industries Ltd 323.97 308.43 30.4 3.67 0

7 14 Steel Authority of India Ltd 0 0 0 0 0

7 15 Sterlite Industries (India) Ltd 51.17 139.03 73.42 112.26 37.54

7 16 Tata Steel Ltd 989.19 779.31 800.09 860.92 841.11

8 17 Hindustan Unilever Ltd 409.49 391.37 338.28 374.79 381.96

8 18 ITC Ltd 267.52 234.63 219.56 547.78 424.95

9 19 Housing Development Finance Corporation Ltd 194.26 145.74 70.63 56.05 66.83

9 20 ICICI Bank Ltd 1423.4 917.76 70.22 1391.89 1458.08

9 21 Punjab National Bank 201.92 85.07 174.12 159.78 130.92

9 22 State Bank of India 1105.65 728.52 1254.37 959.95 145.6

10 23 Infosys Technologies Ltd 119 92 65 45 39.97

10 24 Satyam Computer Services Ltd 92.83 67.8 30 23.58 16.05

10 25 Tata Consultancy Services Ltd 107.19 82.62 48.01 14.79 0

10 26 Wipro Ltd 72.2 65.8 52.21 48.63 46.59

11 27 Mahindra & Mahindra Ltd 306.83 118.23 123.53 111.85 130.62

11 28 Tata Motors Ltd 262.18 203.67 151.11 218.03 615.47

12 29 Tata Power Company Ltd 74.52 73.78 55.68 93.09 76.29

13 30 Reliance Industries Ltd 313.56 121.7 366.98 336.59 0

14 31 Zee Entertainment Enterprises Ltd 22.68 38.51 46.34 33.03 26.65





Table of Deferred Tax Asset of the Sample Companies

Industry wise

Industry 2007 2006 2005 2004 2003

1 Infrastructure & Cement 303.56 257.18 228.92 339.37 312.862 Petroleum 5675.93 5062.28 4032.7 4778.64 3108.98


4 Reality 0 0 0 0 3.38


6 Textiles 62.74 55.17 66.08 102.84 34.96

7 Iron & Steel 1364.33 1226.77 903.91 976.85 878.65

8 FMCG 677.01 626 557.84 922.57 806.91

9 Banking 2925.23 1877.09 1569.34 2567.67 1801.43

10 Information Technology 391.22 308.22 195.22 132 102.61

11 Automobiles 569.01 321.9 274.64 329.88 746.09

12 Energy & Power 74.52 73.78 55.68 93.09 76.29

13 Diversified 313.56 121.7 366.98 336.59 0


0

2000

4000

6000

8000

10000

12000

14000

2007 2006 2005 2004 2003

14 Media & Entertainments

13 Diversified

12 Enery & Power

11 Automobiles

10 Information Tecnology

9 Banking

8 FMCG

7 Iron & Steel

6 Textiles

5 Phamaceuticals

4 Reality

3 Telecomunication

2 Petroleum

1 Infrastructure & Cement






The above table gives information about the composition of Deferred tax Asset in the

deferred tax. Here also the major contributors are petroleum, iron and steel and Banking sector. It is

also evident that the deferred tax assets are significantly less when compared to the deferred tax

liability.

The total deferred tax assets was 8349.1Crs in 2003, 10929Crs in 2004, 8555Crs in 2005,

10338Crs in 2006 and 12773Crs in 2007, which is significantly less.

The following Table presents deferred tax as percentage of deferred tax liability, which

gives the comparative distinction of deferred tax asset and deferred tax liability in the total deferred

tax.

2007 2006 2005 2004 2003

Total DTL 36527.5 31218 26827.2 24721.6 20884.1

Total DTA 12773 10338 8555 10929 8349

0 10000 20000 30000 40000 50000

2007

2006

2005

2004

2003

DTA as a Percentage of DTL

Total DTL

Total DTA







Table of Net Working Capital of the Sample Companies

NET WORKING CAPITAL ( INCL. DEF. TAX)IndGrp

Sr.No Company Name 2007 2006 2005 2004 2003

1 1 ACC Ltd (187) 73 (110) (57) (87)

1 2 Ambuja Cements Ltd 39 91 (192) (227) 242

1 3 Larsen & Toubro Ltd 2507 2548 3144 2071 1459

2 4 Bharat Petroleum Corporation Ltd 974 2538 244 (891) (439)

2 5 Oil & Natural Gas Corpn Ltd 24184 20219 17342 16135 7589

3 6 Bharti Airtel Ltd (5666) (3946) (2222) 3673 3336

4 7 DLF Ltd 5659 1725 365 642 120

4 8 Unitech Ltd 4177 576 295 180 196

5 9 Dr Reddys Laboratories Ltd 2910 1689 1366 930 1232

5 10 Ranbaxy Laboratories Ltd 1112 1011 822 1215 867

5 11 Sun Pharmaceuticals Industries Ltd 1839 1864 1448 220 321

6 12 Grasim Industries Ltd 310 169 146 (83) (13)

7 13 Hindalco Industries Ltd 2625 2917 829 837 1074

7 14 Steel Authority of India Ltd 8017 3471 2323 (744) (23)

7 15 Sterlite Industries (India) Ltd 2605 1675 1217 372 116

7 16 Tata Steel Ltd 6245 (1917) (1960) (2310) (1327)

8 17 Hindustan Unilever Ltd (1621) (1129) (1135) (183) (101)

8 18 ITC Ltd 1959 1259 129 (135) 704

9 19Housing Development FinanceCorporation Ltd 58865 47066 37106 28667 22901

9 20 ICICI Bank Ltd 0 0 0 0 0

9 21 Punjab National Bank 0 0 0 0 0

9 22 State Bank of India 0 0 0 0 0

10 23 Infosys Technologies Ltd 8595 7216 3888 2418 1256

10 24 Satyam Computer Services Ltd 6003 4954 3764 2831 2242

10 25 Tata Consultancy Services Ltd 3683 2639 2232 1009 (221)

10 26 Wipro Ltd 2571 1281 937 358 1300

11 27 Mahindra & Mahindra Ltd 1063 551 350 (8) 342

11 28 Tata Motors Ltd 1997 1923 (20) (1477) (614)

12 29 Tata Power Company Ltd 2279 1668 1225 551 965

13 30 Reliance Industries Ltd 4353 3149 7054 6280 9277

14 31 Zee Entertainment Enterprises Ltd 738 568 935 644 732





Table of Net Working Capital of the Sample Companies

Industry Sector wise with Deferred Tax

Years 2007 2006 2005 2004 2003

1 Infrastructure & Cement 2360 2712 2842 1787 1615

2 Petroleum 25158 22757 17586 15244 7150

3 Telecommunication (5666) (3946) (2222) 3673 3336

4 Reality 9836 2301 659 822 317

5 Pharmaceuticals 5861 4565 3636 2364 2420

6 Textiles 310 169 146 (83) (13)

7 Iron & Steel 19492 6146 2409 (1844) (159)

8 FMCG 338 130 (1006) (318) 602

9 Banking 58865 47066 37106 28667 22901

10 Information Technology 20852 16090 10821 6616 4577

11 Automobiles 3060 2474 330 (1485) (273)

12 Energy & Power 2279 1668 1225 551 965

13 Diversified 4353 3149 7054 6280 9277

14 Media & Entertainments 738 568 935 644 732

(20000)

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

2007 2006 2005 2004 2003


13 Diversified

12 Enery & Power

11 Automobiles


9 Banking

8 FMCG

7 Iron & Steel

6 Textiles

5 Phamaceuticals

4 Reality

3 Telecomunication

2 Petroleum











The above tables and graph clearly depicts the effect of deferred tax on the net

working capital.There is a drastic reduction in the net working capital due to the deferred tax

component in the current liability that is making the company look very efficient in the

working capital management which is not actually the case.

There has been a decrease in net working capital by 235% in 2003, 185% in 2004,

182% in 2005, 174% in 2006 and 153% in 2007. This shows the effect of deferred tax on

net working capital.

There is a decreasing trend in the difference of net working capital due to deferred

tax component.





Table of Current Assets of the Sample Companies

Current AssetsInd

GroupSr.No Company Name 2007 2006 2005 2004 2003

1 1 ACC Ltd 2203 1921 1421 1214 1040

1 2 Ambuja Cements Ltd 1587 1178 585 491 814


2 4 Bharat Petroleum Corporation Ltd 13634 13301 10381 8342 8302


3 6 Bharti Airtel Ltd 5293 3260 2336 3693 3348

4 7 DLF Ltd 9438 3089 1708 1804 1204

4 8 Unitech Ltd 8421 2960 1684 961 777




6 12 Grasim Industries Ltd 2342 2027 1854 1496 1496




7 16 Tata Steel Ltd 13702 4238 4084 2809 3648

8 17 Hindustan Unilever Ltd 3277 3170 2773 3305 3502

8 18 ITC Ltd 6301 5173 3549 3497 3500

9 19Housing Development Finance CorporationLtd 5057 4207 2975 2396 2750

9 20 ICICI Bank Ltd 53001 29534 21714 15339 13521





10 25 Tata Consultancy Services Ltd 7330 5207 3991 2315 12

10 26 Wipro Ltd 6292 4039 2612 2004 1937

11 27 Mahindra & Mahindra Ltd 3748 2749 2300 1525 1613

11 28 Tata Motors Ltd 10142 9488 7086 3696 2982








Table of Current Asset of the Sample Companies

Industry wise including Deferred Tax

Industry 2007 2006 2005 2004 2003

1 Infrastructure & Cement 15675 12634 10801 8504.8 8131.9

2 Petroleum 93279 77517 62930 49977 47189

3 Telecommunication 5292.6 3260 2336.4 3693.1 3347.8

4 Reality 17859 6049 3391.4 2764.2 1980.6


6 Textiles 2342.4 2026.8 1853.9 1496 1495.6

7 Iron & Steel 46393 30976 24995 15373 14879

8 FMCG 9578.6 8342.6 6322.2 6802.3 7001.5

9 Banking 154855 129118 95975 91018 90663

10 Information Technology 33206 24143 17121 11322 7503.611 Automobiles 13890 12237 9385.6 5220.6 4595.5

12 Energy & Power 4041.8 2973 2523.6 1693 2466.2

13 Diversified 29913 24575 28453 22710 22357

14 Media & Entertainments 1153.5 1002.1 1341 993.91 1051.8

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

2007 2006 2005 2004 2003


13 Diversified

12 Enery & Power

11 Automobiles


9 Banking

8 FMCG

7 Iron & Steel

6 Textiles

5 Phamaceuticals

4 Reality

3 Telecomunication

2 Petroleum






Table of DTA as a % of the Current Assets Companies

Industry 2007 2006 2005 2004 2003


2 Petroleum 0.061 0.065 0.064 0.096 0.066


4 Reality 0.000 0.000 0.000 0.000 0.002


6 Textiles 0.027 0.027 0.036 0.069 0.023

7 Iron & Steel 0.029 0.040 0.036 0.064 0.059

8 FMCG 0.071 0.075 0.088 0.136 0.115

9 Banking 0.019 0.015 0.016 0.028 0.020


11 Automobiles 0.041 0.026 0.029 0.063 0.162

12 Energy & Power 0.018 0.025 0.022 0.055 0.031

13 Diversified 0.010 0.005 0.013 0.015 0.000


2007 2006 2005 2004 2003

Total Current assets 436188 341761 273439 225823 216458

Total DTA 12773 10338 8555 10929 8349

2007 2006 2005 2004 2003

% of DTA in Current Assets 2.93% 3.02% 3.13% 4.84% 3.86%

0 100000 200000 300000 400000 500000

2007

2006

2005

2004

2003

Component of DTA in Current Assets

Total Current assets

Total DTA





Percentage of DTA in Current Assets

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2007 2006 2005 2004 2003

% of DTA in Current Assets


It is evident from the above table that there is a meager component of deferred tax

asset in the current assets of the sample companies. It is also evident from the above table

that there is about 3.86% of of deferred tax assets in 2003, 4.84% in 2004, 3.13% in 2005,

3.02% in 2006 and 2.93% in 2007.





Table of Current Liabilities of the Sample Companies

Current LiabilitiesInd

Group

Sr.

No Company Name 2007 2006 2005 2004 2003

1 1 ACC Ltd 2059 1527 1231 975 852

1 2 Ambuja Cements Ltd 1169 703 396 347 266


2 4 Bharat Petroleum Corporation Ltd 11277 9407 9168 8410 7995


3 6 Bharti Airtel Ltd 10722 7017 4457 21 11

4 7 DLF Ltd 3759 1358 1338 1155 1078

4 8 Unitech Ltd 4242 2382 1388 779 579




6 12 Grasim Industries Ltd 1450 1273 1108 946 883




7 16 Tata Steel Ltd 6708 5197 5214 4278 4135

8 17 Hindustan Unilever Ltd 5111 4523 4128 3714 3871

8 18 ITC Ltd 3869 3589 3044 3545 2732

9 19Housing Development Finance CorporationLtd 2827 2209 1951 1758 1666

9 20 ICICI Bank Ltd 38229 25228 21396 18020 18181





10 25 Tata Consultancy Services Ltd 3592 2545 1721 1242 232

10 26 Wipro Ltd 3768 2796 1707 1678 668

11 27 Mahindra & Mahindra Ltd 2666 2052 1760 1329 1095

11 28 Tata Motors Ltd 7358 6942 6541 4659 3491








Table of Current Liabilities of the Sample Companies

Industry wise

Industry 2007 2006 2005 2004 2003

1 Infrastructure & Cement 12565 9141 7183 5938 5095

2 Petroleum 60216 47049 38930 28068 34058

3 Telecomunication 10722 7017 4457 21 11

4 Reality 8001 3740 2726 1935 1657

5 Phamaceuticals 2529 2070 2124 1661 1215

6 Textiles 1450 1273 1108 946 883

7 Iron & Steel 23294 20827 18474 15039 12995

8 FMCG 8980 8112 7172 7259 6603

9 Banking 110793 92645 85121 83426 78775

10 Information Tecnology 12533 8190 6354 4718 2997

11 Automobiles 10023 8994 8300 5988 4586

12 Enery & Power 1757 1321 1288 1180 1522

13 Diversified 18578 16455 17132 12955 10396

14 Media & Entertainments 414 434 411 349 313

0

50000

100000

150000

200000

250000

300000

2007 2006 2005 2004 2003


13 Diversified

12 Enery & Power

11 Automobiles


9 Banking

8 FMCG

7 Iron & Steel

6 Textiles

5 Phamaceuticals

4 Reality

3 Telecomunication

2 Petroleum






Table of DTL as a % of the Current Liabilities Companies

Industry 2007 2006 2005 2004 2003


2 Petroleum 0.26 0.30 0.30 0.41 0.27


4 Reality 0.00 0.01 0.04 0.07 0.09


6 Textiles 0.84 0.95 1.12 0.74 0.71

7 Iron & Steel 0.24 0.27 0.28 0.23 0.25

8 FMCG 0.10 0.09 0.10 0.11 0.10

9 Banking 0.02 0.01 0.01 0.02 0.01


11 Automobiles 0.14 0.12 0.12 0.17 0.22

12 Energy & Power 0.07 0.08 0.08 0.06 0.04

13 Diversified 0.39 0.31 0.27 0.29 0.26


Year 2007 2006 2005 2004 2003

Total Current Assets 281856 227268 200780 169483 161106

Total DTL 36528 31218 26827 24722 20884

0 50000 100000 150000 200000 250000 300000 350000

2007

2006

2005

2004

2003

Component of DTL in Current Liabilities

Total Current Assets

Total DTL





Year 2007 2006 2005 2004 2003

% of DTL in Current Liabilities 12.96% 13.74% 13.36% 14.59% 12.96%

Percentage of DTL in Current Liabilities

12.00%

12.50%

13.00%

13.50%

14.00%

14.50%

15.00%

2007 2006 2005 2004 2003

% of DTL in Current

Liabilities


We can infer from the above table that the component of deferred tax liability in thecurrent liability is significant when compared to deferred tax assets.

Total deferred tax liability amounts to 20884Crs which is 12.96% of total current

liabilities in 2003, 24722Crs which is 14.59% of current liabilities in 2004, 26827Crs

which is 13.36% of current liabilities in 2005, 31218Crs which is 13.74% of current

liabilities in 2006 and 36528Crs which is 12.96% of current liabilities in 2007

There is a increasing trend in the initial years and then a decreasing trend in the

recent years. But the percentage of first and last year as a component of deferred tax

liability in Current liabilities is almost the same.





Table of Deferred Tax Liabilities as a % of Total Liabilities

DTL as a % Total LiabilitiesSr.No Company Name 2007 2006 2005 2004 2003

1 ACC Ltd 0.10 0.11 0.12 0.12 0.12

2 Ambuja Cements Ltd 0.08 0.09 0.12 0.14 0.10

3 Larsen & Toubro Ltd 0.04 0.04 0.05 0.09 0.16

4 Bharat Petroleum Corporation Ltd 0.10 0.11 0.18 0.20 0.20

5 Oil & Natural Gas Corpn Ltd 0.18 0.18 0.17 0.19 0.20

6 Bharti Airtel Ltd 0.02 0.02 0.03 0.00 0.06

7 DLF Ltd 0.00 0.00 0.09 0.14 0.44

8 Unitech Ltd 0.00 0.02 0.02 0.04 0.06

9 Dr Reddys Laboratories Ltd 0.02 0.02 0.01 0.02 0.0210 Ranbaxy Laboratories Ltd 0.05 0.08 0.07 0.06 0.07

11 Sun Pharmaceuticals Industries Ltd 0.03 0.04 0.03 0.07 0.05

12 Grasim Industries Ltd 0.13 0.17 0.20 0.12 0.12

13 Hindalco Industries Ltd 0.08 0.11 0.10 0.13 0.12

14 Steel Authority of India Ltd 0.07 0.09 0.12 0.00 0.00

15 Sterlite Industries (India) Ltd 0.13 0.14 0.10 0.15 0.19

16 Tata Steel Ltd 0.08 0.14 0.17 0.22 0.23

17 Hindustan Unilever Ltd 0.13 0.06 0.05 0.04 0.03

18 ITC Ltd 0.07 0.06 0.07 0.10 0.09

19Housing Development FinanceCorporation Ltd 0.00 0.00 0.00 0.00 0.00

20 ICICI Bank Ltd 0.00 0.00 0.00 0.01 0.01

21 Punjab National Bank 0.00 0.00 0.00 0.00 0.00

22 State Bank of India 0.00 0.00 0.00 0.00 0.00

23 Infosys Technologies Ltd 0.00 0.00 0.00 0.00 0.00

24 Satyam Computer Services Ltd 0.00 0.00 0.01 0.00 0.00

25 Tata Consultancy Services Ltd 0.01 0.01 0.01 0.02 0.02

26 Wipro Ltd 0.00 0.00 0.00 0.00 0.00

27 Mahindra & Mahindra Ltd 0.06 0.06 0.09 0.10 0.10

28 Tata Motors Ltd 0.10 0.10 0.12 0.16 0.18

29 Tata Power Company Ltd 0.01 0.01 0.01 0.01 0.01

30 Reliance Industries Ltd 0.08 0.07 0.08 0.07 0.0531 Zee Entertainment Enterprises Ltd 0.01 0.01 0.01 0.01 0.01





Table of Deferred Tax Liabilities as a % of Total Liabilities

Industry wise

Industry 2007 2006 2005 2004 2003


2 Petroleum 0.16 0.17 0.17 0.19 0.20


4 Reality 0.00 0.01 0.07 0.11 0.26


6 Textiles 0.13 0.17 0.20 0.12 0.12

7 Iron & Steel 0.08 0.11 0.12 0.10 0.10

8 FMCG 0.08 0.06 0.07 0.08 0.07

9 Banking 0.00 0.00 0.00 0.00 0.00


11 Automobiles 0.09 0.09 0.11 0.14 0.15

12 Energy & Power 0.01 0.01 0.01 0.01 0.01

13 Diversified 0.08 0.07 0.08 0.07 0.05


Total DTL as % of Total Liability

0 500000 1000000 1500000

2007

2006

2005

2004

2003

DTL as a part of Total Liabilities

Total Liabilities

Total DTL

2007 2006 2005 2004 2003

Total Liabilities 1440852 1171207 970514 807044 712168

Total DTL 36528 31218 26827 24722 20884







Large Tax Deferring Firms

Companies 2007 2006 2005 2004 2003Bharat Petroleum Corporation Ltd (1762.54) (1768.64) (1669.73) (1444.17) (1226.85)

Oil & Natural Gas Corpn Ltd (8111.86) (7163.31) (5789.39) (5424.98) (4711.58)

Grasim Industries Ltd (1152.56) (1158.28) (1179.29) (602.20) (591.54)

Hindalco Industries Ltd (1171.46) (1228.14) (1134.24) (1195.26) (1025.87)

Steel Authority of India Ltd (1416.83) (1497.42) (1862.70) (15.65) (8.58)

Sterlite Industries (India) Ltd (917.40) (751.07) (509.75) (461.75) (538.01)

Tata Steel Ltd (785.94) (992.18) (851.29) (851.96) (859.53)

Tata Motors Ltd (817.27) (676.79) (620.54) (533.70) (100.98)

Reliance Industries Ltd (6990.53) (4970.82) (4266.82) (3474.84) (2684.88)

Total (23126.39) (20206.65) (17883.75) (14004.51) (11747.82)

Large Tax Deferring under Public Companies

Public Companies 2007 2006 2005 2004 2003

Bharat Petroleum Corporation Ltd (1762.54) (1768.64) (1669.73) (1444.17) (1226.85)

Oil & Natural Gas Corpn Ltd (8111.86) (7163.31) (5789.39) (5424.98) (4711.58)

Steel Authority of India Ltd (1416.83) (1497.42) (1862.70) (15.65) (8.58)

Total DTL in Public Companies (11291.23) (10429.37) (9321.82) (6884.80) (5947.01)

Large Tax Deferring Private Companies

Private Companies 2007 2006 2005 2004 2003

Grasim Industries Ltd (1152.56) (1158.28) (1179.29) (602.20) (591.54)

Hindalco Industries Ltd (1171.46) (1228.14) (1134.24) (1195.26) (1025.87)

Sterlite Industries (India) Ltd (917.40) (751.07) (509.75) (461.75) (538.01)

Tata Steel Ltd (785.94) (992.18) (851.29) (851.96) (859.53)

Tata Motors Ltd (817.27) (676.79) (620.54) (533.70) (100.98)

Reliance Industries Ltd (6990.53) (4970.82) (4266.82) (3474.84) (2684.88)Total DTL in Private Companies (11835.16) (9777.28) (8561.93) (7119.71) (5800.81)





Total Tax Deferred by Private and Public Companies

DTL Comparision b/w Public and Private Companies

(14000.00)

(12000.00)

(10000.00)

(8000.00)

(6000.00)

(4000.00)

(2000.00)

0.00

2007 2006 2005 2004 2003

Total DTL in Public Companies

Total DTL in Private

Companies

The above table shows major companies, which deferred the tax to the maximum

limit. The list covers several public sector firms, particularly oil companies. The above nine

companies out of 31 companies have deferred around 50% to 60% of total tax deferred in

the last five years. Among these 9 companies there are 6 private sector companies and out

of these Hindalco was till recently with the government and other three are the public

sector companies.

The total tax deferred by the public companies amount to 5947.01Crs in 2003,

6884.80Crs in 2004, 9321.82Crs in 2005, 10429.37Crs in 2006 and 11291.23Crs in 2007.

2007 2006 2005 2004 2003

Total DTL in Public Companies (11291.23) (10429.37) (9321.82) (6884.80) (5947.01)

Total DTL in Private Companies (11835.16) (9777.28) (8561.93) (7119.71) (5800.81)





On the other hand the total tax deferred by private companies amount to 5800.81Crs

in 2003, 7119.71Crs in 2004, 8561.93Crs in 2005, 9777.28Crs in 2006 and 11835.16Crs in

2007.

While tax deferred by the public sector companies is significant; the real impact of

the same on revenue may not be significant. Instead of the government receiving revenue

from tax and spending it on the public, these public sector companies reinvest the same in

the economy. Though the same logic applies to tax deferred by the private sector, the only

difference is the inability of the government directing where the tax deferred should be

invested in the economy.





Deferred Tax and Growth of Firms

Our earlier analysis shows that an important source of deferred tax is differences in

depreciation values claimed under income tax and depreciation actually charged to profit

and loss account. Since the total depreciation should not be more than the value of the asset,

the accelerated depreciation under income tax will lead to a situation of no depreciation in

terminal years of the asset forcing the company to pay more tax than what it should pay at

that time. However, it saves such additional tax in the initial years when accelerated

depreciation is in force. In other words, the company benefits from the time value of money

equals to present value of tax deferred in the initial years and paid later.

Tax deferral has long been recognized as a desirable strategy because of the time

value of money. An economic benefit received today (i.e., taxes not paid) has greater value

than an equal benefit received at some point in the future. Conversely, a cost incurred at

some point in the future (i.e., taxes paid) is less detrimental than an equal cost incurred

today. A cost that can be deferred and never paid is even better (Fenderand Miller, 1997).

The time value of deferred tax for a zero growth firm, which invested Rs. 100 inyear 0 and claims a depreciation of 25% for income tax purpose under written-down value

(WDV)method and charges 15% straight line method for the profit and loss account with a

tax rate of35% and cost of capital of 12% would be Rs.1.17.In other words, for a zero-

growth firm, the present value of deferred tax with the above assumed numbers is 1.17% of

the value of the assets invested. In the above situation, the firm initially defers the tax but

subsequently pays the amount.





Present Value of Deferred Tax (Reinvestment Equal to Book Depn. Rate)

Book of Accounts Tax Account

Year Op.Net

BlockDepn.

Cl.Net

Block

Op.Net

BlockDepn.

Cl.Net

Block

DeferredTax

PV ofDeferred

Tax

0 100.00 15.00 85.00 100.00 25.00 75.00 3.50 3.13

1 100.00 15.00 85.00 90.00 22.50 67.50 2.63 2.34

2 100.00 15.00 85.00 82.50 20.63 61.88 1.97 1.76

3 100.00 15.00 85.00 76.88 19.22 57.66 1.48 1.32

4 100.00 15.00 85.00 72.66 18.16 54.49 1.11 0.99

5 100.00 15.00 85.00 69.49 17.37 52.12 0.83 0.74

6 100.00 15.00 85.00 67.12 16.78 50.34 0.62 0.56

7 100.00 15.00 85.00 65.34 16.33 49.00 0.47 0.42

8 100.00 15.00 85.00 64.00 16.00 48.00 0.35 0.31

9 100.00 15.00 85.00 63.00 15.75 47.25 0.26 0.23

10 100.00 15.00 85.00 62.25 15.56 46.69 0.20 0.18

11 100.00 15.00 85.00 61.69 15.42 46.27 0.15 0.13

12 100.00 15.00 85.00 61.27 15.32 45.95 0.11 0.10

13 100.00 15.00 85.00 60.95 15.24 45.71 0.08 0.07

14 100.00 15.00 85.00 60.71 15.18 45.53 0.06 0.06

15 100.00 15.00 85.00 60.53 15.13 45.40 0.05 0.04

16 100.00 15.00 85.00 60.40 15.10 45.30 0.04 0.03

17 100.00 15.00 85.00 60.30 15.08 45.23 0.03 0.02

18 100.00 15.00 85.00 60.23 15.06 45.17 0.02 0.02

19 100.00 15.00 85.00 60.17 15.04 45.13 0.01 0.01

20 100.00 15.00 85.00 60.13 15.03 45.10 0.01 0.01

100 100.00 15.00 85.00 60.10 15.02 45.07 0.00 0.00Present Value of Deferred Tax Beneit 12.47

However, if we relax the condition of zero-growth and allow the firms to invest

only to the extent of depreciation amount claimed under the books of assets on the same

type of asset, then it is possible to get a positive deferred tax benefit up to 20 years and

thereafter the tax payable under both the accounting methods would be the same. Table 3

shows the relevant computation. The present value of the deferred tax in such a situation

would be Rs. 9.46. The firm is entitled to Rs. 15 every year in new assets such that the netblock value is always set to 100.





On the other hand, if the firm was able to invest an amount equal to depreciation

claimed under income tax purposes every year, then it is possible to enjoy a positive

deferred tax benefit for up to 40 years. The present value of the deferred tax benefit is Rs.

12.96. The firm has to invest Rs. 25 every year to set the net block value at Rs. 100 under

this condition. If the firm invests more than the depreciation of the particular year, then the

present value of tax savings would increase further. For instance, if the firm invests Rs. 50

every year then the present value of deferred tax saving would be Rs. 21.72.





Summary of Findings

The analysis reveals the huge amount of deferred tax liability and deferred tax

assets in the sample companies.

It is found that the deferred tax component in the few companies have a major

contribution when compared to other companies.

Companies which were public companies earlier or now, or the companies which

got privatized in recent years got more benefited by the provision.

It is found that manufacturing industry like petroleum and Iron and steel have a

major contribution to the deferred tax liability due to huge investments in capital

assets.

It is found that the net working capital position of the companies has improved

significantly due to deferred tax liability which is not actual improvement due to

efficiency but a notional improvement due to deferred tax liability which is

reducing the net working capital.

It is also found that deferred tax liability is acting as a spontaneous source of funds

available to the company and the provision is acting as a blessing in disguise to

these companies.

It is found that the deferred tax component is reducing every year which shows the

improving efficiency in the revenue collection mechanism of the state, which is a

positive signal for the state.







Conclusion

Companies prepare two sets of profit statements one for the shareholders and one

for tax return purposes. Assuming the profit statement prepared for shareholders reflectsthe true and fair value due to the various provisions in tax law which needs the profit

statements to change accordingly for the payment of tax.

There are several sources for deferring the tax; differences in the depreciation rate

followed under the Companies Act and Income Tax Act are different.

The study reveals the benefit that the company can take due to these differences in

the computation of depreciation and its deferring.

It is also evident that the availability of such an incentive system is really benefiting

the corporates, though the growth rate is determined by economic forces. However it has

benefited the Indian corporates to a larger extent to show there effectiveness.

It evident from the decreasing deferred tax component that the government is trying

eventually to take way the provision made available to the corporates. As the purpose of

the provision is not implemented and does not make any sense in this economic boom

scenario.





Bibliography:

www.capitaline.com

www.ICAI.com

www.ACCA.com

www.IFRS.com

www.Hindubussinessline.com

Documents

Deffered Tax a Corporate Advantage