Companies in the cement, commodities, realty and manufacturing sectors, which have seen improved results, reported a sharp 50% jump in advance tax payments in 2006-07.
Analysts believe that part of the reason could also be that companies are witnessing a rise in the effective tax rate as the government gradually phases out exemptions.
According to data with the income tax department, of 105 top tax-paying companies, the advance tax payments of 29 companies grew over 50% in 2006-07. The total corporate tax collections grew about 39% on year to touch Rs1.44 lakh crore.
The pattern of advance tax payments reflects the combination of a business cycle and supply constraints in the economy, said Gaurav Taneja, head of tax practice, Ernst & Young. Supply constraints in sectors such as cement has returned pricing power to manufacturers, finance minister P. Chidambaram had said in Parliament last week.
“My gut feel is that it reflects the buoyancy in some of the sectors,” said Ashutosh Chaturvedi, associate director at accounting firm PricewaterhouseCoopers.
It might also reflect the possibility that effective tax rate for some sectors has been rising following a gradual end to exemptions, said Sudhir Kapadia, head of taxation at accounting firm KPMG.
The sharp growth in banks’ advance tax payments reflects the robust credit growth in the recent past, said Taneja. Banks’ credit has grown by 31.8% and 28%, respectively, over the last two years.
In early 2007, banks partly supported their credit growth through high-cost bulk deposits. Taneja felt this would adversely impact the profits and advance tax payments of banks in the current financial year.
A few telecom companies, such as Bharti Televenture Ltd and Bharat Sanchar Nigam Ltd, featured in the list. Telecom companies cannot be compared with the rest of the list as they are in the middle of a gradual withdrawal of tax exemptions, which would mean that for a while longer, their advance tax payments would be increasing from a low base.
The withdrawal of exemptions and the consequent upward impact on effective tax rates, could have contributed to the growth in advance tax payments of some of the companies, said Kapadia.
The result is that higher effective tax rate could have shown up in the high growth rate of advance taxes in some sectors, hypothesized Kapadia. KPMG is yet to do a thorough analysis of effective tax rates.
A look at 2006-07 results of three of the companies, JSW Steel Ltd, Hindalco Ltd and Indian Overseas Bank, showed the effective tax rate had increased in the case of two companies and declined in the case of one.
“We are a moderately high taxed country,” said Kapadia, setting it in the context of China’s move to charge a 25% corporate tax beginning January 2008. In India, domestic companies are currently charged 33.99% corporate tax.
Effective tax rates are usually higher for fast-moving consumer goods (FMCG) companies as they have few avenues of tax exemption. Such companies in the list did not see a rise in advance tax collections in 2006-07.
Nestle India Ltd, an FMCG company, recorded a 4.65% fall on year in advance taxes in 2006-07. Consumer goods companies face stiff competition, which restricts their pricing power, felt Taneja.
LG Electronics Pvt. Ltd, a consumer durables company in the list of top-105 companies, also recorded a drop in advance tax payments in 2006-07.
Unlike consumer goods companies, cement companies such as Grasim Industries Ltd and Gujarat Ambuja Cements Ltd, have seen a spurt in advance tax payments following a recent rise in profits.
Burgeoning Coffers (Graphic)