Advance tax paid at the end of June by the country’s top companies show that a wide gamut of players—from the banking, software, steel, manufacturing, pharmaceuticals, finance, cement and realty sectors—expect their net profits to grow by more than 50% this year.
Banks and other financial sector firms, such as insurance companies, were among the most upbeat of top 202 companies in terms of advance tax payments.
According to tax experts, the rule of thumb is to draw a one-to-one correspondence between the growth rate of tax payments and profits, provided there are no changes in the tax environment during the rest of the year.
Government data on the first quarter’s corporate tax show that despite a slowdown in credit offtake following the Reserve Bank of India’s (RBI) monetary measures to cool the economy and about a 9% appreciation in the value of the rupee, these companies are upbeat about the year’s profit growth.
Advance taxes are paid upfront in each quarter by the companies based on their internal estimates of profits.
“It is a fair estimate (of the year’s projected profits), but it is a tad conservative,” said Pallavi Joshi Bakhru, partner, Taxation & Advisory Services, of the first quarter’s advance tax payments.
It is only by September that the advance tax payments would give a clearer picture, as half the fiscal year will have passed, she added.
The 202 companies collectively paid Rs11,552 crore in June, about 68% of the aggregate tax collections of Rs16,937 crore. Their advance tax payments grew 34.04% year-on-year, which was much faster than the year-on-year growth of 21.80% recorded by all companies paying advance tax.
Oil and Natural Gas Corp. Ltd was the single largest taxpayer this year, paying Rs1,010 crore, which is slightly lower than last year’s Rs1,038 crore.
The country’s biggest bank by assets, State Bank of India, paid an advance tax of Rs503 crore in June, an increase of 41.29% year-on-year. Among other Indian banks, HDFC Bank Ltd paid advance tax of Rs140 crore, an increase of 75% year-on-year; Bank of Baroda paid Rs100 crore, higher by 50% year-on-year; and Indian Bank’s advance tax came to Rs90 crore, a rise of 671.87% year-on-year.
Foreign banks such as Standard Chartered Bank and Citibank N.A. also registered a sharp rise in advance tax payments. Despite the slowdown in credit offtake in the current fiscal year, banks remain upbeat about profits.
One of the reasons for the sharp growth is the base effect, suggested Shahina Mukadam, head of research at IDBI Capital Markets. Last year, banks made large provisions on investments as interest rates had begun to harden. “In the current year, yields have started softening, which may be the reason for the projections,” she added.
“We are definitely not expecting any significant hike in rates this year or in provisioning on account of prudential measures initiated by RBI,” said Bhavesh Shah, head of research at Asit C. Mehta Investment Intermediates Ltd, on the reason for banks remaining upbeat.
Cement companies such as Gujarat Ambuja Cements Ltd and India Cements Ltd witnessed a sharp jump in advance tax payments. Gujarat Ambuja paid advance tax of Rs120 crore, higher year-on-year by 140%, while India Cements paid Rs13.50 crore, an increase of 136.84% year-on-year.
Cement companies have seen some increase in price realizations on an annualized basis, said Mukadam. Along with price increase, they have squeezed operating costs, which should help them add to their profits, she added.
Steel and mining companies are among the lot which have seen the sharpest jump in advance tax payments. JSW Steel Ltd paid an advance tax in June 2007 of Rs89 crore, 790% higher than June 2006; Steel Authority of India Ltd paid Rs450 crore, a rise of 53.58% year-on-year; and Rashtriya Ispat Nigam Ltd paid Rs141 crore, up year-on-year by 45.36%. Steel companies’ profit projections flow from the increase in product prices since last year, said Shah.
Realty company DLF Ltd paid Rs50 crore in advance in June, an increase of 138.10% year-on-year. Other than rising profits, increasing tax collections from realty companies are also the outcome of greater scrutiny efforts on them by the income-tax department, said a finance ministry official.
Advance tax payments of some of the media companies also registered a sharp growth this year. Bennet Coleman and Co. Ltd, the publisher of The Times of India and The Economic Times, paid Rs60 crore, up from Rs26.5 crore last year. Sun TV Ltd paid advance tax of Rs32.2 crore, a jump of 138.52% in relation to the previous year, while Zee Telefilms Ltd paid Rs15 crore, a rise of 200% year-on-year. The slow spread of the Conditional Access System, which has helped television channels plug revenue leakage at the cable operators’ end, has led enhanced performance expectations among analysts, said Shah. HT Media Ltd, which publishes Mint, paid Rs9.75 crore, up from Rs6.27 crore.
(Kush Verma contributed to this story.)