Corporate Advance Tax Reflect A Depressing Picture

After global credit rating agencies such as S & P and Fitch having downgraded India’s economy, the Indian business houses are also seen perceiving an upcoming dent in profits for the next financial year i.e. FY12-13. This can be seen from the latest first quarter FY13 advance tax numbers exhibiting a flattish to moderate growth over last year’s same period.

For the first quarter, the advance tax paid by the Indian corporates was merely up by 4.9 per cent as against 18 per cent last year, according to a daily newspaper. The advance tax paid in June 2010 also recorded 19 per cent growth. Most of the country’s largest corporates such as State Bank of India, Reliance Industries Ltd, Larsen & Toubro, Tata Steel, Tata Power, Asian Paints, etc have seen modest growth in this quarter’s advance tax.

Indian corporates pay advance tax on their projection earnings a fortnight before the end of every quarter. These numbers can be looked as a proxy for the financial performances of these companies. The Indian banking, pharmaceutical and personal care firms have paid good amount of advance tax showing considerable growth over last year.

The current economic slowdown is the main reason for this suppressed growth in advance tax payment. India’s economy grew by only 5.3 per cent during the last quarter of FY11-12, exhibiting the eighth successive quarterly slowdown and the slowest pace in nine years. Earlier, the index of industrial production (IIP) contracted by 3.5 per cent in March 2012 as compared to a robust 9.4 per cent growth in March 2011. The IIP weakened considerably in March 2012 relative to growth in February 2012. With the base effect reflecting decline in growth to 5.3 per cent in April 2011 from 9.4 per cent in March 2011, the IIP growth performance improved in April 2012 as compared to the de-growth in March 2012.

According to the income-tax norms, Indian companies are required to pay 15 per cent of their total advance tax in the first quarter, followed by 30, 30 and 25 per cent in the next three quarters. India Inc’s first installment of advance tax payment for the year 2012-13 witnessed a subdued growth with some firms posting moderate growth and many others reporting lower or flat growth exhibiting slowdown in economic activity and pressure on the bottomline. Though the latest advance tax numbers exhibit only 15 per cent of the year’s financial performance, we feel that the government may miss this year’s direct tax collection target, thus worsening its already stressed finances.