Advance tax payments indicate good quarter for banks
December, 17th 2014
Early indications emerging from advance tax payments for the December quarter suggest banks may have seen a strong quarter, possibly helped by treasury gains made on account of an increase in the value of their government bond holdings.
However, some firms such as Larsen and Toubro Ltd (L&T), often seen as a bellwether for the economy, reported lower advance tax payments, suggesting continued pressure on core sector firms.
Advance tax payments of 15 top companies registered in Mumbai for the three months ending 31 December showed a 10.1% increase from a year earlier, primarily with the help of banking companies.
To be sure, the early reported numbers are dominated by banks and final trends accounting for a wider range of companies could throw up different trends.
Indian companies pay advance tax a fortnight before the end of every quarter on their projected earnings and these numbers are seen by most analysts as a reflection of their financial performance—a relationship that usually holds up—and sometimes doesn’t.
In line with the Income-Tax Act, companies are required to pay 15% of their total advance tax in the first quarter, followed by 30%, 30% and 25% in the next three quarters, respectively.
Among banks, State Bank of India (SBI) is likely to have paid `1,420 crore, up 25.7% from a year ago as advance tax. SBI, the nation’s largest lender, has traditionally been the highest taxpayer in the Mumbai area, followed by Reliance Industries Ltd (RIL). HDFC Bank Ltd is likely to have paid `1,500 crore against `1,350 crore, up 11% for the reporting quarter, while Bank of India is likely to have paid `350 crore against `200 crore, up 75%.
Banks may have seen an improvement in earnings due to higher treasury income on account of a fall in bond yields since October. The 10-year bond yield has fallen from 8.51% on 1 October to 7.83% as of Monday’s close. This could have allowed banks to book profits on sales on parts of their bond portfolio and also book notional gains that can be used to offset provisioning requirements. Bond prices and bond yields move in reverse directions.
A slowdown in the build-up of bad loans may also ease the need for increased provisions across public sector banks, in turn boosting profitability.
Apart from banks, L&T is likely to have paid `180 crore, registering a decline of 33.3% from a year ago, while Mahindra and Mahindra Ltd posted a marginal decline in advance tax payments at `250 crore. State-owned oil marketing company Bharat Petroleum Corp. Ltd reported a 48.6% increase in quarterly advance tax to `309 crore. According to a tax official, while Indian and foreign banks have continued to perform well, the automotive sector has underperformed this quarter. The official declined to be named.
Mint could not ascertain the advance tax payments made by the highest taxpayers in the Mumbai area such as RIL, Tata Consultancy Services Ltd and Life Insurance Corp. of India.
The Mumbai tax circle accounts for at least 33% of the total direct tax collections in the country. The current year’s tax target for the Mumbai circle is `2.3 trillion. The direct tax target for the year to next March is `7.36 trillion.
In the first six months of the financial year, net direct tax collections increased 7.09% to `2.68 trillion against a budget target of 15.31% for 2014-15. This was due to high income tax refunds of 54.51% during the period, according to the Central Board of Direct Taxes.
Gross direct taxes collection during the April-September quarter of 2014-15 are up 15% at `3,46,144 crore, against `3,01,063 crore collected during the same period last year. ??
The gross collections of corporate tax have shown an increase of 15.31 % to `2.22 trillion against `1.93 trillion collected during the same period last year. Advance tax collection has also shown a growth of 15.28% during the first half of the year against growth of 7.66% shown at the same time previous year.
“Historically, I believe advance tax collection is an imperfect indicator of GDP (gross domestic product) growth. Having said that, what has clearly emerged over the past six months is that the economy is recovering slowly and steadily. My sense is that we should continue to see this improvement over next quarter as well,” said Saurabh Mukherjea, chief executive officer of the institutional equities business at Ambit, an investment management services company.