Mumbai: Advance tax payments made by 100 firms based in Mumbai, India’s financial capital, rose by 14% for the three months ending June, signalling moderate growth in corporate profits amid fears of shrinking margins.
Indian companies pay income tax (I-T) every quarter on their projected earnings and these figures are used as a proxy for financial performance estimates, though the correlation of earnings with tax paid has been mixed.
Going by norms laid down by the Income-tax Act, firms are required to pay 15% of their total advance tax in the first quarter (Q1), followed by 30%, 30% and 25% in the next three quarters, respectively.
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“We have touched our expectations and are quite satisfied with the advance tax figures,” said P.P. Srivastava, chief commissioner of income tax (Mumbai).
“The first quarter advance tax collections are up by 14% compared with corresponding period of previous year. I am very optimistic that in the coming quarter, the advance tax payment will increase,” Srivastava added.
Sajjid Chinoy, India economist at JPMorgan Chase and Co., said advance tax collections for Q1 are relatively weak compared with the previous quarters, suggesting squeezed profit margins of Indian firms.
“This is not surprising, given the surge of input costs and the incomplete pass-through to output prices. However, this does necessarily suggest a sharp moderation in volumes, especially in the context of buoyant indirect tax collections in April and May,” he added.
Ashish Chaturmohta, vice-president (research) at Anand Rathi Financial Services Ltd, said the advance tax numbers are largely flat, but it is too early to come to a conclusion about profitability prospects as this is the first quarter of the fiscal year.
Saurabh Mukherjea, head of equities at financial services firm Ambit Capital Pvt. Ltd, said the advance tax numbers do not lead to any meaningful economic indications. “They do not tell much to an investor and do not indicate profitability or growth. Advance tax numbers are largely dependent on the tax structure and inflation,” he pointed out.
Earnings of listed Indian firms in the March quarter grew at the slowest pace in three quarters as rising input costs eroded profit margins even as sales remained buoyant on the back of higher prices.
The advance tax numbers are critical in the context of India’s factory output moderating to 6.3% in April, lower than 7.8% in March. This is based on a revised index with fiscal year 2005 as the base year. Based on the old series, the Index of Industrial Production in April grew at 4.4% year-on-year against 13% in the same month a year ago.
Economic growth in the March quarter was also lower than expected, at 7.8% year-on-year, down from an upwardly revised 8.3% in the December quarter. This rate was lower than the consensus estimate of 8.1% by analysts and lowest since December 2009.
Rising inflation and interest rates, raised nine times so far since March 2010 to fight inflation, are expected to dampen demand in the world’s second fastest growing major economy. The country’s banking regulator has made it clear that it will fight inflation by tightening rates and will not bother much about growth slowing at this juncture.
Financial firms, especially foreign and Indian banks, led the growth in tax paid for Q1, while other companies presented a mixed bag.
State Bank of India (SBI), the nation’s largest lender, is the highest taxpayer in the Mumbai circle at Rs1,100 crore, about 29% up from the corresponding period of the previous year, figures from the tax department show.
Private sector HDFC Bank Ltd and ICICI Bank Ltd, too, showed growth in advance tax payments. HDFC Bank paid Rs400 crore, up 26.98%, and ICICI Bank paid Rs390 crore, up by 11.42%.
Among foreign banks, Hongkong and Shanghai Banking Corp. Ltd paid Rs250 crore, a growth of 11.11%, and Citibank NA paid Rs150 crore, up by 50%. None of them is listed in India.
Reliance Industries Ltd, India’s top firm by market value, paid Rs900 crore, up 38.46%, and is the second largest taxpayer after SBI.
India’s biggest software exporter, Tata Consultancy Services Ltd, paid Rs250 crore, more than double the advance tax shelled out in the corresponding quarter of the previous year, while other Tata group companies paid smaller amounts.
Overall tax collection target for the Mumbai region in the current fiscal is Rs1.85 trillion, 18% more than last year, according to I-T department officials.
Graphic by Yogesh Kumar/Mint