Can you tell me about the huge tax demand of Rs.72,000 crore that the tax department has made on LIC, as mentioned in the prospectus?

You are right that LIC is currently battling the government on several courts over demands to pay up Rs.74,895 crore as pending retrospective taxes. In fact, this has been mentioned as risk factors in the prospectus filed with SEBI, although no provisions have been made for the same. LIC currently has 63 tax cases pending against them, of which 37 cases pertain to direct taxes on unreported income. Direct taxes account for Rs.72,762 crore of tax demand.

This number is significant for three reasons. Firstly, the disputed sums involved are larger than the amount being raised by the government through this IPO. Secondly, these are accumulated over several years so they include a good chunk of penalty and interest component too, which is not provided for. Lastly, this disputed amount is a multiple of the annual surplus of LIC (shareholder profit), which is less than Rs.3,000 crore per annum.

The allegations made by the Income Tax department is that LIC had underreported its total income for a number of assessment years since March 2005. Many of these cases are currently under dispute and even if a part of these translate into actual liability, it could be a significant risk factor for LIC. More so because most of these losses are not provided for. It could put pressure on cash flows and restrict ability of LIC to grow and boost market share.

The risk needs to be put in perspective. In the last few years, the cash position of LIC has fallen drastically. Even if some appeals are ruled in favour of the Income Tax department, it might result in a huge tax impact on profits and cash flow of LIC. The surplus in the case of LIC was just Rs.2,974 crore for FY21. That is unlikely to improve in FY22 in any significant manner. The outstanding potential liability is almost 25 times larger than that.