The economic slowdown appears to be casting its shadow over corporate profitability expectations. So while direct tax proceeds have almost doubled in the first four months of the fiscal, the advance tax kitty has not risen proportionately.
While corporate collections from direct tax up to end-July increased by 46.95% over the previous fiscal, advance tax collections rose by a mere 18%. Until July 31 this year, the government netted Rs 23,500 crore in advance tax, against Rs 19,900 crore in the same period a year earlier. In 2007, advance tax collections from the first instalment increased 35%, against Rs 14,700 crore up to July 31, 2006.
?There has been an increase in corporate advance tax collections, but it is lower than what was recorded last fiscal,? an official source told FE. A clearer picture will probably emerge once the second instalment is paid by September 15, he added. Advance tax is considered a good indicator of corporate profitability as it is paid based on the year?s estimated earnings.
Instead of paying a lump sum at the end of the fiscal, companies make their tax payments in four instalments, the deadlines for which are June 15, September 15, December 15 and March 15. Companies pay 15% of advance tax estimates by June 15, another 30% by September 15, followed by another 30% by December 15. The remaining 25% is paid by March 15.
Tax officials said the top 50 advance-tax paying companies paid at least 25% higher tax in the June 2008 instalment. But smaller companies have made lower payments. According to the list of 100 top advance taxpayers until June 15, many banks and infrastructure companies expect a fall in profits and have paid less tax.
The higher cost of oil, raw materials and financing, along with the weakening rupee, has squeezed corporate margins, analysts said. So, while toplines may grow reasonably well this year, expenses would also be higher, impacting overall profitability.
?There is a sense that some sectors like automobiles are slowing down. There will continue to be growth in margins, although there is also greater pressure on them, which will impact advance tax payments,? said Gaurav Taneja, partner, Ernst & Young.
Mahesh Purohit, director, Foundation for Public Economics & Policy Research, said, ?In view of the anticipated lower growth in the economy, companies may estimate a decline in their growth of income, which may affect their tax and contractual payments.? The September 15 payment will be crucial, he added.
The increase in direct taxes until July has been mainly because of better collections, an income-tax official explained. Despite the lower advance tax collections, the CBDT is confidence of achieving its Budget target of almost Rs 4 lakh crore.