Maruti fears Q2 net profit may fall due to indexation benefit withdrawal

To increase deferred tax liability provision by Rs850cr

MUMBAI: Maruti Suzuki India has announced that it will need to increase its provision for deferred tax liability by approximately Rs 850 crore due to the withdrawal of the indexation benefit for calculating long-term capital gains on debt mutual funds, as introduced in the Finance (No.2) Act 2024.

Maruti said in a regulatory filing that this change would reduce the company’s net profit in the second quarter of the current fiscal year.

Indexation benefit

Indexation is a financial mechanism used to adjust the purchase price of an asset to account for inflation over time, reducing the tax burden on capital gains.

This is particularly relevant in the context of long-term investments, such as real estate or mutual funds, where assets are held for an extended period.

In a regulatory filing, the company explained that it had been making accounting provisions for deferred tax liability based on the fair value gains of its investments in debt mutual funds.

The withdrawal of the indexation benefit, which was previously available for such calculations, will have a one-time impact on the company’s profit after tax in the second quarter of the ongoing fiscal year.

New tax rules

Under the new tax rules, the indexation benefit has been removed for debt mutual funds purchased before April 1, 2023.

As a result, the tax rate on long-term capital gains has been changed from 20 per cent plus surcharge and cess (with indexation) to 12.5 per cent plus surcharge and cess (without indexation).

Due to this change, the accounting provision for deferred tax liability, as of June 30, 2024, will need to be increased by approximately Rs850 crore.

Accounting provision

Rahul Bharti, Maruti Suzuki India’s Chief Investor Relations Officer, emphasized that this adjustment is purely an accounting provision due to the revised tax rules.

He clarified that this provision does not relate to the company’s operational activities and will not impact its operational profit.

Bharti also noted that the change would affect the tax on other income in the future, specifically when the company redeems its investments in these funds.