Boom time for companies: What record profits may mean for govt's revenue

India’s corporate sector is enjoying a dramatic turnaround. The Reserve Bank of India’s (RBI’s) studies of corporate finances show that, for a shifting sample of 2,600+ listed private companies, excluding financial enterprises, net profits in the first half of this financial year are already about 80 per cent of the profits earned during all of last year. Even if the profit growth rate falters in the second half of the year, the RBI sample’s profits for all of 2021-22 could end up showing growth in the region of 60 per cent. This comes on top of a more than doubling of .....
India’s corporate sector is enjoying a dramatic turnaround. The Reserve Bank of India’s (RBI’s) studies of corporate finances show that, for a shifting sample of 2,600+ listed private companies, excluding financial enterprises, net profits in the first half of this financial year are already about 80 per cent of the profits earned during all of last year. Even if the profit growth rate falters in the second half of the year, the RBI sample’s profits for all of 2021-22 could end up showing growth in the region of 60 per cent. This comes on top of a more than doubling of profits in 2020-21, but that was mostly a recovery from a sharp dip the previous year.

 

It is important to qualify that a good chunk of the corporate sector lies outside the RBI’s sample database: For instance, big unlisted firms (like Hyundai, Coke and Pepsi, IBM and Accenture) plus banks and public sector behemoths (Indian Oil, ONGC, Coal India, etc). Still, banks (including government-owned ones) have been doing better than before, and there is no reason to expect that large unlisted enterprises have done differently from listed ones. Moderation in profit growth would be on account of non-bank public sector enterprises. Even making allowances for that and for inferior performance by small and some medium enterprises (whose share in the total profit pie is small), one should expect a surge in profits this year.

 

This slice of good news comes along with others — including handsome growth in the RBI sample’s sales revenue (more than 30 per cent in the July-September quarter, compared to a year earlier), accompanied by static interest payments that translate into higher net profit margins. As Business Standard has reported, the corporate debt-equity ratio is at a six-year low. Such numbers could explain several things, including the buoyancy on a stock market widely seen as over-valued. Perhaps it is, but price-earnings ratios are a misleading indicator when earnings are shooting up.

 

The remarkable thing about this performance is that it comes despite low capacity utilisation, and the existence of several distressed sectors. Such an “output gap” as it is called would suggest that there is headroom for further growth in sales without fresh investment in capacity, and therefore without the new debt that would carry an interest tag as additional cost. Translated, margins could improve further if sales growth continues.

 

There are obvious implications here for government revenue. In her Budget a year ago, the finance minister expected modestly to garner Rs 5.47 trillion from corporation tax in 2021-22. Admittedly, this was 22.6 per cent more than the Rs 4.46 trillion collected in Covid-affected 2020-21. But more pertinently, it was lower than the revenue collected in the two prior years of 2019-20 and 2018-19. Twice bitten by lower revenues, the finance minister clearly decided to be cautious in her expectations of a rebound.

 

As things may turn out, if one were to narrowly focus on the RBI’s tally of corporate profits for the first half of the year, profits for the full year could well be double the level of 2018-19. That year had seen record corporate tax collection of Rs 6.64 trillion. If much higher profits this year do not propel corporation tax revenue to a level higher than that peak, and massively exceed what has been budgeted, something is wrong with corporation tax.

 

Recent changes to corporation tax rates, announced in stages by the two Modi governments, were to be revenue-neutral. Lower rates were to be matched by the removal of exemptions, so that the effective tax rate and the nominal tax rate would no longer be wide apart. The thrust of that reform was sensible; among other things, it brought the nominal tax rates closer to what prevails in other large economies. The question to be answered on Budget day is whether the changes were in fact revenue-neutral, given that the goods and services tax rates were also supposed to be revenue-neutral but turned out differently. If it now turns out differently for corporation tax as well, the finance minister should take a good look at which tax exemptions to target.

Key stories on business-standard.com are available to premium subscribers only.

Already a premium subscriber?

Subscribe to get an across device (Website, Mobile Web, Iphone, Ipad, and Android Phone applications) access to Premium content, Breaking News alerts, Industry Newsletters, Stock and Corporate news alerts, access to Archives and a lot more.


Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel
Read More on

CORPORATION TAX

TAX REVENUE

CORPORATE EARNINGS

WEEKEND RUMINATIONS

UNLISTED COMPANIES

T N NINAN

INDIA INC

OPINION

COLUMNS


Most Read

Markets

Companies

Opinion

Latest News

Todays Paper

News you can use