Taxonomy of the recovery

Advance tax is one of the best lead indicators of the likely performance of the corporate sector and the economy. It is paid in four instalments every year and is based on a company’s internal estimate of profit during the year. The advance tax of close to 100 of India’s largest taxpayers for the first quarter of 2010-11 indicates companies are upbeat about their prospects this year. Aggregate advance tax collections of these companies grew by at least 18% in relation to the corresponding period of the previous year. When advance tax data is disaggregated and classified according to sectors, the signals point to a growing momentum in manufacturing, something captured with a lag by other kinds of economic data such as the Index of Industrial Production. A factor that needs to be kept in mind is that as advance tax is paid on a company’s internal assessment of how it will perform, the signals from the data get more accurate as the year progresses. For now, the advance tax data indicates India’s largest corporate taxpayers are upbeat about the future.