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Friday, February 25, 2011

Goldmine in the budget-Effective tax rates(industry wise) for Indian corporates 2009-10

The annual Union Budget is sometimes seen as a farce since many proposals go unimplemented(though that may change due to Outcome based budgeting and other controls). But some nuggets of information are invaluable.

For equity research analysts, investors, bankers and others interested in making/checking financial forecasts and projections, an important input is the effective tax rate. Unless an expert(CA/other tax professional) opines otherwise, the tax rate is mechanically assumed as the maximum statutory rate. Till 2006-07, this was the only option for 'naive' forecasting(without the benefit of expert opinions etc). But now, a much overlooked document hidden in the stack of Budget documents comes to your rescue.

The Statement of Revenue Foregone(available for Budget 2010-11 here) presents tax preferences(tax revenue foregone due to policy decisions of exemption, rebate, deduction etc) as a pro forma revenu expenditure in the Budget. The rationale is that these are subsidy payments to preferred taxpayers.
expenditures” and it is often argued that they should appear as expenditure items in the Budget.

The Appendix to this statement gives the effective tax rates for 74 industries spanning the manufacturing and service sectors. It gives the sample space(companies, total PBT, total PBT) along with effective PAT %. Most are in the bracket 20%-30%(versus the effective tax rate of 23% generally). Outliers are(those in bold are under scrutiny by the IT Dept)

  1. 5%-10%-Textiles
  2. 10%-15%-Diamond Cutting,Sugar,Film labs,Software,ITES, Property Developers
  3. 15%-20%-Cement, Drugs, Fertilizers/Chemicals/Paints, Petrochemicals, Consultants
  4. Above 31%-Commission agents, TV channels, motion picture producers,Cable TV producers, Banks, Security Agencies,Legal, Advt, Beauty Parlours
It would make an interesting project to analyze why the tax rates vary as per industry. 
Takeaway:- Given these rates, one can accurately make projections of tax rate without having to use advisors. 

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