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Reliance Tax Saving Plan

Reliance Tax Saving Plan

The Gigantic Deals

Reliance Industries Limited had announced a hot streak of 14 new investors in its JIO Platforms between April to July. The fastest ever in India. The company raised a sum INR 1,52,318 crore by selling a 33% stake in JIO Platforms. So, how much tax did Reliance Industries or JIO Platforms end up paying? Let’s have a look at The Reliance Tax Saving Plan.

Shareholding Shares Held (in cr.) Value (in cr.) Stake (%)
Reliance Industries 18,055.7 180,557 67.05
Facebook Inc. 2,407.4 43,574 9.99
Google 1,863.9 33,737 7.73
Silver Lake 277.8 5,656 1.15
Silver Lake (additional) 223.3 4,547 0.93
Vista 558.2 11,367 2.32
General Atlantic 324.1 6,598 1.34
KKR 558.2 11,367 0.93
Mubadala 446.6 9,094 1.85
ADIA 279.1 5,684 1.16
TPG 223.3 4,547 0.93
L Catterton 93.0 1,895 0.39
The Public Investment Fund 558.2 11,367 2.32
Intel Capital 93.0 1,895 0.39
Qualcomm 35.9 730 0.15

source: Bloomberg

JIO’s total equity as of March 2020 comprised of

  • Equity share capital at INR 4,961 crore
  • Other equity at INR 1,77,064 crore
  • Total INR 1,82,025 crore

‘Other equity’ means OCPS (Optionally Convertible Preference Shares) issued to RIL. But, the stake sales were ‘not’ structured as a transfer of shares from RIL. In other words, OCPS held by RIL in JIO was not converted to equity shares for the investors. Also, dilution of earlier shareholders (except RIL) did not happen when shares were issued to new investors.

The Tax Saving Plan of Reliance

Normally these partnerships would have led Reliance to pay huge capital gains tax. JIO was incorporated in November 2019. Therefore, the gains would have been categorized as short term capital gains. JIO had a plan of becoming net-debt free. And paying these taxes wouldn’t have helped at all.

Here is what Reliance did:

  • Reliance invests nearly INR 1,80,000 cr. in Reliance Jio. This is transferred at the same value to Jio Platforms Ltd. (evidently at cost value).
  • Jio Platforms pays for it with the help of a loan from Reliance Industries. This loan was structured as OCPS or Optionally Convertible Preference Shares. In other words, a loan that can be converted to equity.
  • When companies invest in Jio Platforms, Jio Platforms pays back Reliance Industries and redeems the OCPS. This will not lead to any tax liability as it’s just paying back of the loan earlier taken.

Note 1: Reliance is not creating any tax liability by transferring shares to JIO Platforms according to this ITAT ruling. This ruling states that the transfer of shares to a 100% subsidiary is exempt from taxes.

Note 2: Also, according to Section 47A, ‘Reliance has to pay taxes if there’s a profit’ since ‘it is no longer a 100% subsidiary’ (after all the partnerships). But it appears that Reliance keeps reducing its stakes in Reliance Jio and still gets paid. Hence it is just getting back its investment. It doesn’t have to pay any taxes, too. The actual profit is basically sitting in the remaining 68% stake of Reliance on Jio Platforms. This leads to zero taxable profit in the transaction.

This is how Reliance got repaid a chunk (INR 1,29,046 crore) of its OCPS, thereby, reducing its net debt position. Also, JIO Platforms retained a large portion (INR 23,272 crore) of its funds for future purposes.

Sources: Thehindubusinessline, CapitalMind

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Got Questions? Ask Away!

  1. Hey @sushil_verma

    There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.

  2. Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.

    For eg,

    • Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
    • Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
    • Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.

    Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.

  3. The benefit Section 80EEB can be claimed by individuals only. An individual taxpayer can claim interest on loan of an electric vehicle of up to INR 1.5 lacs u/s 80EEB. However, if the electric vehicle is used for the purpose of business, the vehicle should be reported as an asset, loan should be reported as a liability and the interest on loan can be claimed as a business expense irrespective of the amount. (We have updated the article with the changes).

    Thus, if you have a proprietorship business, you should claim interest amount as a business expense only if the vehicle is used for business purpose. However, if it is used for personal purpose, you can claim deduction of interest u/s 80EEB in your ITR since you would be reporting both personal and business income in the ITR (under your PAN).

    As per the Income Tax Act, the deduction under Section 80EEB is applicable from 1st April 2020 i.e. FY 2020-21.

  4. Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback. :slight_smile:

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