Wednesday, September 16, 2009

Is D-Street misinterpreting advance tax numbers?

Advance tax numbers for many companies are out and the D-street is seeing a sign of revival in the numbers. Let's see if the enthusiasm is overdone or not.

First of all, the D-street is forgetting about the big increase in taxes levied by the FM in budget of 2009, i.e. MAT has been increased from 15% to 20%. This change in policy itself increases the taxes by around 33%, 20/15=1.33, it is that simple. Secondly, many companies did not pay higher advance tax in first quarter since MAT recommendation came in budget only on 2nd July 2009, well after the first advance tax was already paid. So YoY comparison of taxes is not going to help.

Some articles are comparing QoQ advance numbers which is worse than comparing YoY numbers since first quarter advance tax paid by companies is 15% of the estimated taxes for the full year while the second quarter advance tax paid by companies is 30% of the estimated taxes for the full year. Read the article on the website of Income Tax Department. The companies have to pay not less than 15% taxes by June 15 and not less than 45% taxes by September 15.

With these two points in mind, it is clear that by adding the advance tax of June 15 with September 15, we can calculate the estimated taxes that the company expects to pay for FY2010. Here is the table:

AT=Advance Tax
CompanyQ1 ATQ2 ATTotal ATTotal AT/0.45 = Estimated FY10 TaxActual Tax for FY2009Estimated FY10/Actual FY09 change
Tata Steel23040063014002113-33.75%

RIL and TCS already has to pay 33% higher tax due to higher MAT so RIL taxes will actually go down after MAT increase is considered. Tata Steel stock went up by 8% today with this news of higher QoQ advance tax. Nobody can stop bulls!!!!!
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