Mumbai: Advance tax payments made by 100 firms based in the country’s financial capital rose by one-fourth for the three months ending March, belying fears of a tight quarter with shrinking margins for Indian companies.

“This indicates that all is well with corporate earnings. The advance numbers are largely on track," said Ajay Parmar, head of institutional research at Emkay Global Financial Services Ltd.

Ahmed Raza Khan/Mint

Firms in India pay income tax every quarter on their projected earnings and these figures are used as a proxy for financial performance estimates. However, the correlation of earnings with tax paid has at best been mixed.

The outlook for this quarter is pessimistic, with many brokerages increasing their downgrades because of input cost increases and margin pressures. Ambit Capital Pvt. Ltd has upgraded earnings estimates for eight firms against 31 downgrades. The brokerage covers about 70 firms. Similarly, Citigroup Inc.’s upgrade/downgrade ratio is 26/38. However, on the brighter side, the latest Index of Industrial Production shows consumer demand is still strong, growing 11.3% over a year ago.

Financial companies, especially foreign banks, led the growth in tax paid for the fourth quarter. Manufacturing firms presented a mixed bag, with some auto and cement makers leading the gains.

State Bank of India (SBI), the country’s largest lender, is the highest taxpayer in the Mumbai circle at 1,500 crore, about 19% down from a year ago, figures from the tax department show. On the other hand, peers such as HDFC Bank Ltd and ICICI Bank Ltd showed growth in tax numbers. HDFC Bank paid 540 crore, up 80% from a year ago, while ICICI paid 475 crore, up one-third from a year ago.

This might bring some cheer to investors in the sector. Although credit growth has been galloping along at 23% this year, deposits have lagged and, consequently, banks are facing tight margins. “Bank stocks should recover now," said D.D. Sharma, senior vice-president (retail) at Anand Rathi Financial Services Ltd.

Among the foreign lenders, none of whom are listed locally, Hongkong and Shanghai Banking Corp. Ltd (HSBC) paid 449 crore, a growth of 136%, while Citibank paid 450 crore, three times the year-ago amount.

Among other firms, Reliance Industries Ltd (RIL), India’s top firm by market value, paid 1,054 crore, up 36.8% from a year ago amid an improvement in the outlook for its refining business. RIL is the second largest taxpayer after SBI.

Tata Steel Ltd is the third largest taxpayer in the city at 987 crore, an increase of 92% over a year ago.

Of the 16 members of the National Stock Exchange’s Nifty index for which advance tax figures are available, 12 have paid more tax this year. These firms together paid 16% more tax in the fourth quarter compared with a year ago.

“This quarter’s collection is better than what we had estimated," said an income-tax official who didn’t want to be named, expressing confidence that the target will be achieved. Mumbai’s 1.52 trillion direct tax collection target for the year is also likely to be met, said another tax official.

According to a statement by the Central Board of Direct Taxes earlier this month, corporate income tax in April-February grew 24% from a year ago to 2.23 trillion. The department also said net direct taxes have reached 75.38% of the 4.46 trillion target for this fiscal year.