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Sooner the better
Hindustan Lever has joined the list of companies accounting for tax on deferred basis. To be sure, the first listed company to adopt deferred tax accounting was ICICI. However, the point is that it is not mandatory and companies have not been known to adopting accounting practices which are not mandatory. How many MNCs, for example, publish quarterly results in India? Being subsidiaries and with mandatory consolidation, quarterly results to parent companies is a must, and although these results are prepared by the companies, Indian shareholders don't get them. Deferred tax basically boils down to accounting for timing differences. The classic example is depreciation. In a company's books, depreciation is calculated at rates prescribed in Sch XIV of the Companies Act and for tax purposes, it will be calculated on written down value, and the concept is based on a block of assets. The books never give any indication as to whether the company is running out of unabsorbed depreciation (higher the component ofleased assets, shorter will be the reversal period) or whether the company has carried forward loss -- interest which is capitalised in books can be treated as revenue expense for tax. Timing differences are bound to reverse but interest in the above example is a permanent difference. As a result of deferred tax not being a mandatory requirement, we have companies showing zero tax in the first half and paying tax at the rate of above 25 per cent of PBT for the full year. Under the deferral method, the tax expense for a period includes the provision for tax payable and the tax effect of timing differences deferred to or from other periods. MAT is the direct result of not following deferred taxation. The sooner companies take this step, the better for shareholders.Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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