Advance tax payment is a staggered system of paying taxes every quarter. For the corporate sector, it is seen as a barometer of the company's performance as the tax payments are made in line with profit expectations. The tax payment numbers thus act as an indicator of the company's near term profitability and also signal headwinds, if any.
The advance tax numbers for the second quarter of financial year 2011-12 (FY12) are reportedly 18% higher on a YoY (year-on-year) basis. The numbers thus show an impressive rise over the corresponding quarter of the previous year. Particularly if one keeps the lower GDP (Gross Domestic Product) growth and inflation in mind.
However, the advance tax payments have grossly fallen short of the government's expectations of 31% YoY growth in tax collections for the full fiscal. Unless one assumes that the final two quarters will make up for the lower tax collections, the government coffers could well remain poorly funded.
A less than expected advance tax payout often brings a lot of disappointment to investors too. They believe that lower profits in the coming quarter spell doom for their stock investments. We think that there cannot be a worse analysis of stock market behavior. And if advance tax numbers were really such a solid indicator of business prospects Income Tax authorities would be the wealthiest.
Short term numbers like advance tax can mislead investors by offering a myopic view of the business cycle. To top that they could even misrepresent facts as the company could have an extraordinary expense or income that quarter. Further for most sectors, growth in the first quarter of the fiscal is slower and picks up in the latter half. Hence investing based on advance tax numbers is the surest way of picking the wrong stocks, most often at the wrong prices.
What the investors instead need to worry about is the macro economic impact of lower direct tax collections. Given the lower tax collections, the government would find bridging fiscal deficit all the more difficult. Further, the Reserve Bank of India (RBI) would be worried about interest rates severely impacting corporate profits. To top that if the government fails in utilizing the tax collections appropriately, India's debt burden could soar. Subsidies on fertilizers and energy products could also become a thing of the past thus impacting consumer affordability. Investment in infrastructure projects could hit an all time low in terms of execution rates. None of these are very encouraging for equity markets. Thus lower advance tax numbers are certainly something that investors should worry about. But not in terms of their impact on the next quarter's earnings per share (EPS).