Corporate tax collections for FY23, while overshooting budget estimates, could be smaller than estimated with the tax paid out seeing a drop in Q2FY23 so far.

Corporate taxes from manufacturing and services companies have fallen by nearly 15% year-on-year so far in the Q2FY23 earnings season. For a sample of 1,699 companies, the taxes provided are Rs 52,575 crore compared with Rs 61,653 crore in Q2FY22.

Banks, however, have seen a 67% y-o-y jump in tax expenses, with roughly Rs 20,400 crore having been paid by a group of 31 banks. Thanks to elevated input inflation, the profit before tax (PBT) reported by manufacturing and non-bank services firms in Q2 FY23, has fallen by 20.5% y-o-y to Rs 1.94 trillion.

Although the revenues went up by nearly 29% y-o-y during the quarter, the operating profit margin contracted by 455 basis points y-o-y. Higher interest costs, which have shot up by 17.6% y-o-y also weighed on the profits.

In contrast, banks and financial companies are doing extremely well. They are in a sweet spot where loan rates are rising fast, the cost of funds is still low, and demand for credit has re-bounded post the pandemic. Moreover, provisions for loan losses have come off sharply over the past year or so.

The government has budgeted for corporate tax collections of Rs 7.23 trillion in FY23, an increase of 13% over the revised estimate (RE) of Rs 6.35 trillion for FY22. With banks expected to perform well, the target could be exceeded even if the share of manufacturing companies isn’t as high as anticipated. The tide could turn for manufacturing companies in the second half of the year as commodity prices have softened considerably in the last couple of months.

The corporation tax rate for companies, with a turnover or gross receipts of more than Rs 400 crore, is 22%. However, the effective tax rate varies between 22.9% and 25.6% depending on the income slab. The effective tax rate for Indian companies fell to 22.5% in FY2020 from 27.8% in FY2019 after the government cut the corporate tax rate to 22% from 30% (before surcharges). Companies that earned a PBT of over Rs 500 crore, accounted for more than 50% of the collections in FY19.