The manufacturing sector is contributing a bigger portion of their profits to government coffers as tax provisions compared to services sector, which remains in the limelight as far as contribution to GDP growth or other parameters are concerned.
For the half-year ended September 2007, tax provisions accounted for 27.2% of pre-tax profits for manufacturing sector, against only 23.8% for service sector. Even textiles, which recorded sharpest fall in profits during the quarter, under the impact of appreciating rupee, has provided more than 26% of its profits as tax.
If manufacturing sector had same tax rate as service sector and had used the surplus to boost compensation to its employees, an important reason for migration of white-collar talent from manufacturing to service sector, it would have managed to pay them almost 10% more.
Within manufacturing, metals, at 30.3%, is the highest tax-paying sector, whereas pharma is placed most attractively with tax rate of less than 19%. Manufacturing sector can draw some comfort from the fact that tax provisions have come down from about 31% of PBT in FY05 to the current level.
For services, rates were lower than the current rate, at 22.9% in FY05, indicating some sort of convergence of tax rate for different sectors. Within services, financial services have better tax rate, whereas top grosser in terms of profits, IT and telecom continue to be among the lowest taxpayers, at 12% and 15.4% of their pre-tax profits. Worse, tax provision of IT industry has come down from about 13.7% in FY05, and 12.4% in FY07. For telecom, the rate is nearly constant.
About 10% of total tax provision is recorded as deferred tax, meaning this would be paid to the government after a period of time, depending upon the clause under which the deferral has been granted. Though not a tax exemption, this provides liquidity and saves cost on interest for the concerned company.
Fringe benefit tax, contrary to perceptions, forms only a small part at 1.3% of total tax provisions. Even for IT sector companies, it is around 2.1% only. If we look at the tax provisions as percent of total income, most of the manufacturing sector have a lower share, whereas service sector score high.
While this may be good from tax collection perspective, it actually indicates lower profitability of manufacturing companies. Another interesting fact that comes out of the analysis is that top 100 companies in terms of total income, account for as much as 72.5% of total tax provisions. This set has nearly same share in pre-tax profits also, although the share in total income stands lower at 67.5%.