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How does advance tax affect market?
June, 28th 2007
Every quarter advance tax numbers of companies are eagerly awaited by equity market players. Most investors take cue from these numbers to plan their investment strategy. ET delves into the importance of advance tax figures and its impact on the stock market.

What is an advance tax?

Like the name suggests companies have to estimate their profits and pay advance tax accordingly. Under the Income Tax Act, companies are required to spread their tax liability through the year namely June, September, December and March. The tax has to be paid by the 15th of the specified month based on the estimated profits that a company is likely to earn during the year.

How is advance tax paid by companies?

Companies have to pay 15% of their total tax in the first quarter, i.e. June 15, of any fiscal year. In the next quarter (September 15), 45% of the total tax needs to paid; followed by 75% by December 15; and finally by March 15, 100% of the estimated tax for the year has to be paid.

How are advance tax figures used by equity market?

Advance tax is an important yardstick for analysing a companys performance. Market players compare advance tax paid by a company during the quarter with that of the corresponding year to understand the performance of that company during the year. Analysts use this figure as a parameter for valuing a particular
company.

Why is it that these figures often lead to a jump in share prices?

Advance tax figures along with various other indicators are used as proxy to estimate a companys profits during the given quarter and for the full year. Profits determine the valuation of a company.

If it is felt that a company will declare a higher profit than expected, the market will push up the share price accordingly. Similarly, if it is expected that a company will post lower profit during the period, share price of that company may take a hit.

Does a lower advance tax always show a negative indication for the company?

A lower advance tax shows that the profit will be lower, but the main question is whether the market has factored it in the stock price. If the market gets an indication that a company may post lower profits and if it is already built into the stock price, then the advance tax numbers will just be a reiteration of this figure.

There will be nothing new based on which the stock price will change, and due to this the impact may not be negative. The impact of advance tax has to be considered in tune with market expectations.
 
 
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