India Inc did well in Q1 FY24; why did corporate tax growth dip?

A significant drop in corporate tax revenue growth in the first quarter of fiscal year 2023-24 (Q1 FY24) contrasts strikingly with the robust profit growth of publicly listed companies, according to a Kotak research report.

This unexpected divergence can be attributed to two factors: (1) a potential shift in the timing of tax payments and (2) the likelihood of reduced profits in the expansive unlisted sector. Historical data suggests that we might see a rebound in corporate tax income during FY24, recovering from the sharp decline in the first quarter. However, it's worth noting that actual collections could fall short of budget projections.

As for the impact of COVID on corporate tax seasonality, before the pandemic, there was a well-established pattern: lower tax collection in the first quarter, increasing as the year progressed. Post-COVID, however, we've seen a different pattern, with a comparatively higher proportion of taxes collected in the first quarter (potentially due to frontloading) and a decreased proportion in the fourth quarter.

(Front-loading post-COVID would mean that a relatively higher proportion of corporate taxes are being collected in the first quarter of the fiscal year compared to the pre-pandemic pattern, which saw tax collections more evenly spread or perhaps concentrated in later quarters.) Q1 FY24 may signal a return to pre-COVID trends, implying a possible increase in collections in the second half of FY24. Importantly, taxes from publicly listed companies haven't shown significant seasonal fluctuations.

Read the Kotak Institutional Equities report here.