NIRMA LTD.-DISCUSSION ON TAX RATES

(a) Compute the average tax rate of your company for the past few years (compare it

with one of the peers)

(b) Discuss the specific reasons behind the high / low corporate tax rates paid by your

company for the last 1-2 years (among others the scheduled notes of financial

statements would be very useful in this one)

Nirma Limited:

The following table depicts the Profit before Tax (PBT), the Provision for direct taxes and

the Average Tax Rates paid by Nirma Limited for various years.

Nirma Ltd. FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

PBT 377.03 352.81 344.02 178.39 226.58

Current Tax 54.5 63 106.5 20 26

FBT 0 0 0.44 0.5 0.4

Deferred Tax 75.73 5.16 -4.03 48.77 -29.55

TOTAL TAX 130.23 68.16 102.91 69.27 -3.15

Profits 246.8 284.65 241.38 109.12 229.73

Provision of Taxation- earlier years written back 0 0 0 110.67 12.18

less: exceptional item loss of assets on accident

0 0 0 -111.38 0

Average Tax Rates 34.54102 19.31918 29.91396 23.96388 -1.46922

Salient Points:

The average tax rate saw a decrease in FY 2005. This may be due to:

o The deferred taxes allocated were very less (Rs. 5.16 Crores).

o The company was envisaging to set new projects due to which it might have

got tax rebates from the government. The details are:

“The Company is envisaging to set up coke ovens having total capacity of 150,000 MT to meet its requirements It

is intended to set up the same along with Waste Heat Recovery Boiler to utilize the fuel gas generated from the

coke ovens for generation of power. The expected power generation will be to the tune of 12-15 MW and will be

entirely free of cost and will allow the Company to meet with part requirements of power for coke and other

utilities captively. In order to meet with total power requirement round the year, the Company is also envisaging

Fuel Fired Boiler (lignite / petcoke based) of 60-80 MT / hour which will enable the Company to meet with its

entire power requirement captively.”1

The tax rate also saw a decline in FY 2007 because of loss of assets on accident.

The average tax rate in FY 2008 was negative due to negative deferred taxes being

more than the current taxes paid. Nirma also acquired Searles Valley Minerals Inc.

(SVM) and Searles Valley Minerals Operations Inc. (SVMO) (Collectively “SVM”)

the USA based Soda Ash producer.

Tamil Nadu Petro Products:

The following table depicts the Profit before Tax (PBT), the Provision for direct taxes and

the Average Tax Rates paid by Tamilnadu Petroproducts Ltd. (a peer of Nirma Ltd.) for

various years:

Tamil Nadu Petro Products

FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

PBT 36.36 7.3 1.46 -15.27 -18.39

Provision for direct taxes 14.15 -4.52 -0.58 -4.21 -6.48

Tax Rate (%) 38.92 -61.92 -39.73 27.57 35.24

The firm has negative provisions for tax throughout the last four years. This might be due

to:

o The company operates in Petroproducts and hence obtains rebates from the

government.

o As at 31st March 2007, the company has investments of Rs. 2,764.50 lacs in SPIC

Electric Power Corporation Private Limited (SEPC) made during the period 1995

1 Annual Report of Nirma Ltd, 2004-05

to 2003 and advances against equity of Rs.28.72 lacs made during the financial

years 2006 and 2007. 2 This has attracted rebates from the government.

o The company suffered a loss in FY 2007 with the corresponding negative tax rate

giving a positive average tax rate in that year.

c) If you want to take up a VRS scheme for the company (or any other capex plan) then

estimate the marginal tax rate to be taken for your company (i.e., case of future financial

planning).

In India, there is a flat tax rate of 30%. The marginal tax rate is thus equal to 30%. An

introduction of VRS scheme or any other capex plan will increase the expenditure and reduce the

profits before tax. However, the marginal tax rate being constant at 30% will see no difference.

Hence, the marginal tax rate to be taken for Nirma Ltd. will be 30% itself.

2 CMIE-Prowess: Notes To Accounts