The revenue department of the finance ministry estimates that Corporate India could have evaded over Rs 20,000 crore in taxes in 2007-08 had it shown mark-to-market losses on forex derivative transactions. According to the income tax department, in the assessment of companies that entered into such transactions in 2007-08, there was no uniformity in how they accounted for losses in such transactions. These were set off against profits by them.
Marking to market means assigning value to a position held in a financial instrument based on its market price on the closing of an accounting period. Some companies reflect such losses in their balance sheets without making any corresponding adjustment in profit and loss account while others book such losses in profit and loss account that results in reduction of book profit.
According to a ministry official, since the loss is notional as no sale or settlement of contract has taken place and also the assessees, in this case companies, continue to hold those assets, the losses should not be allowed while computing the tax. In fact, last year, the income tax department issued guidelines to its field officers directing them to cautiously look into such practices adopted by the companies. It said such losses would not be allowed to be deducted from the total income. Also, speculative losses on hedging transactions would not be allowed except in certain conditions, it said.
The department studied the annual reports of several companies and found that big corporate houses like RCom showed foreign derivative loss of Rs 468.73 crore arising out of marking related derivative contracts to market in the profit and loss account.
Similarly, Bharat Petroleum Corporation provided Rs 1.75 crore as losses on the outstanding derivatives while Larsen and Toubro provided Rs 171.53 crore as net loss arising out of fair valuation of outstanding derivatives contract. Satyam Computers Ltd has for the quarter ended June 39, 2008, showed a loss of Rs 227.7 crore on foreign exchange forward and option contracts.
The sources said the department has already sent notices to a few companies asking them to explain the deductions claimed by them from the total income while few other companies would be sent the notices soon. The sources, however, refused to divulge the names of the companies to whom such notices have been sent.
