Almost half of India?s top 50 companies ranked by tax paid have coughed up far more than what their profits are likely to warrant this year. Their largesse will help the government keep tax receipts close to the budget estimate in a year of acute slowdown. These firms account for over 48% of all advance tax receipts. Of course, they will get tax refunds in the subsequent year once the final profit figures turn out to be lower. However, the finance ministry is able to take credit for such revenue in this fiscal. It helps the government create an illusion of better cash flows for now.
This is evident from the fact that the rate of growth of their year-on-year tax liability is higher than that of gross profit. The asymmetry explains why advance tax figures are not slowing in tune with corporate profitability.
A matching of the data on the rate of growth of profit for these companies (first quarter, 2011-12) with the rate of growth of advance tax is illuminating. As the list shows, 21 companies among the 50 have paid advance tax at rates totally out of whack with their profitability.
Senior government officials, including Central Board of Direct Taxes chairman MC Joshi, have recently said they were under intense pressure to cover the gap opening up in fiscal deficit. However, Joshi made this comment after the second installment of advance tax figures were in.
Tax specialists say it is rare for a company to exceed the rate of tax payout compared with its profitability. Usually, the tax growth should be lower than that of profits as various offset provisions in tax laws kick in. But as Shyamal Mukherjee, executive director, PwC, says, this could also reflect the uncertain investment situation. ?Many of the manufacturing companies have used up their depreciation-related tax cutbacks but have not invested in fresh assets to earn more cutbacks.? So, the tax liability has mounted. The equivalent position in the financial sector would be if banks have already provided for bad debts and are cutting back fresh exposure.
Of the 21 companies that have supposedly overpaid tax, 14 belong to the public sector. So, whereas State Bank of India?s profits have declined by 18%, its tax liability is holding up almost unchanged ? a dip of only 1.4%.
Similarly, NTPC profits for the first quarter have risen 14.9%, but taxes have jumped 38%.
Some leading private sector companies too figure in this league. Sesa Goa, whose profits have dipped by 22% for the June quarter, has paid 44% more advance tax including the second installment. RIL, which has recorded 7.97% higher gross profit for the Q2 has paid 37.6% more tax.
While it is technically possible for a company to cut back its tax outgo in sync with emerging profitability trends in the subsequent two instalments in December and March, this is unlikely. First, tax collections in India peak rather than decline in the last installment. Also, given the huge cash outgo involved, unless there are good reasons, companies do not want to park idle funds as tax as the interest they earn is far below borrowing costs. Finally, tax officials are reluctant to make a mid-course correction and often ask the companies to pick up their refunds in the next fiscal. In the first half of this year, tax refunds have increased 130% to R62,200 crore against R27,000 crore last year, which means the government was again leaning on them to make good the receipts.