New Delhi: Many Indian companies expect to turn lower profits in the year ending 31 March compared with last year, confirming fears of a significant slowdown in business in the wake of the global economic crisis.
The lower expectations, manifested in lower advance tax payments made by these firms, will likely increase the government’s deficit, and force it to increase borrowings as it tries to shore up the economy.
Preliminary information on advance tax payments flashed by television channel CNBC-TV18 showed a general slowdown with companies from the real estate and manufacturing businesses leading this trend. Consumer products and financial services companies, however, bucked the trend and paid more tax than they did last year—an indication that they expect to turn higher profits.
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Aggregate details of total advance tax collections for the quarter ending 31 March were not available on Monday and finance ministry officials said companies were still making payments as the deadline, 15 March, was a bank holiday. While much of the advance tax information flashed by the channel pertained to Mumbai-based companies, this is likely to capture the broader national trend. Companies based in Mumbai account for around 43% of the Rs2.22 trillion the tax department plans to collect as corporate tax this year.
Large companies in the manufacturing sector such as Tata Motors Ltd, Bajaj Auto Ltd and Reliance Industries Ltd have shown a contraction in their advance tax payments for the quarter ending March, the last of the fiscal year for most Indian companies, as compared to payments in the corresponding period of the previous year.
Reliance’s tax payment for the quarter contracted by 20% to Rs370 crore, while Bajaj’s plunged by 35% to Rs60 crore during the same period.
Tata Motors did not pay advance tax, compared to a payment of Rs75 crore in the corresponding period of the previous year.
In January 2009, factory output contracted by 0.8% as compared with the corresponding period of the previous year. In the first 10 months of the current fiscal (April 2008 to January 2009), factory output grew by 3% as compared with an 8.7% growth in the corresponding period of the previous year.
Financial services companies, especially banks, have done well this year as have firms that make and sell consumer products such as soap, shampoo and toothpaste, and this is evident in the advance tax payments by companies in these businesses.
Hindustan Unilever Ltd, India’s largest consumer products company, paid Rs130 crore as advance tax, 30% more than what it did last year. Consumer products companies received a boost from two of the government’s three fiscal stimulus packages through cuts in excise and customs duties on their merchandise and inputs respectively.
Life Insurance Corp., the state-owned insurer, paid 23% higher advance tax at Rs810 crore.
India’s interim finance minister Pranab Mukherjee, during his 16 February budget speech, revised the estimate of corporate tax collections in 2008-09 to Rs2.22 trillion. According to data on the website of the controller general of accounts, corporate tax collections up to 31 January 2009 were Rs1.50 trillion.
Corporate taxes, which have grown by between 20% and 40% a year over the last six years, have been the mainstay of the Union government’s revenue. The trend in corporate tax collections, therefore, provides an early indicator of the magnitude of fiscal deficit and the extent of upward pressure government borrowing can put on interest rates.
“Advance tax is just a reflection of the economic condition we are in,” said Gaurav Taneja, partner at audit and consulting firm Ernst and Young. However, on account of the large scale of expansion undertaken by most companies in the last two years, Taneja felt that operating profits, which capture the benefits of depreciation on new equipment, will probably not be as badly impacted as post-tax profits.
Graphics by Ahmed Raza Khan / Mint