Maruti Suzuki To Face One Time Hit In Q2 Due To Change In Tax Laws

Maruti Suzuki India is expected to take a significant one-time hit on its profits in Q2 FY 2024-25 due to recent tax changes introduced in the Finance (No. 2) Act 2024, the company said in a filing. The new law has withdrawn the indexation benefit for calculating long-term capital gains (LTCG) on debt mutual funds purchased before April 1, 2023. As a result, the company will need to increase its accounting provision for Deferred Tax Liability (DTL) by approximately ₹8,500 million, impacting its Profit After Tax (PAT) for the quarter.

Previously, the tax rate on LTCG for debt mutual funds was 20 per cent (plus surcharge and cess) with the benefit of indexation, allowing investors to adjust gains for inflation and reduce their taxable income. However, under the new tax regime, the indexation benefit has been removed, and the applicable tax rate has been reduced to 12.5 per cent (plus surcharge and cess) without indexation.

Maruti Suzuki, like many other companies, had been making provisions for DTL on the fair value gains of its debt mutual fund investments. The changes in the tax regime require the company to restate these provisions to reflect the new tax structure. The revised provision is expected to lead to an additional ₹8,500 million DTL, directly impacting the company's Q2 profits.

The ₹8,500 million increase in DTL will be recorded as a one-time adjustment in the financial statements for Q2 FY 2024-25. Although this adjustment will reduce the company’s reported PAT, it does not represent an immediate cash outflow. The actual payment of tax will be made when Maruti Suzuki redeems these mutual fund investments. The final tax liability may differ from the current estimate based on the actual gains realized and the tax rates applicable at the time of redemption.

This development is a direct consequence of recent tax reforms aimed at simplifying tax calculations and offering a lower tax rate in place of indexation benefits. For companies like Maruti Suzuki, the change has resulted in an increased accounting provision, signalling a higher expected tax burden in the future.