TAX NEWS - June 2010

Market pares gains as RIL drops

The key benchmark indices pared gains to hit fresh intradays low in afternoon trade as lower US index futures triggered profit taking after recent strong gains. Index heavyweight Reliance Industries (RIL) edged lower. The barometer index BSE Sensex was up 25.39 points or 0.15%, off 92.16 points from the day's high. Seven out of 13 sectoral indices on BSE were in green. The market breadth was strong as mid and small-cap indices on BSE outperformed the Sensex.

The market opened on a firm note on higher advance tax payment by most Indian firms and on strong global cues. The BSE Sensex and the S&P CNX Nifty struck 6-week highs at the onset of the trading session. The market came off the higher level in morning trade. The market regained strength later in volatile trade. The market gave up most of the gains in afternoon trade as lower US index futures encouraged profit taking.

The government after market hours on Tuesday, 15 June 2010 proposed to impose capital gains tax on all stock market transactions by Indians and overseas funds as a part of changes in tax laws. As per the second draft of the direct tax code (DTC) released on Tuesday, the securities transaction tax (STT) will stay and rates will be calibrated. In its first draft DTC unveiled last year, the government had proposed to scrap the securities transaction tax.

The DTC has proposed taxing gains from investments in the stock market and also equity-linked mutual fund units at the applicable rate of taxation. The DTC has also proposed some taxes on income of foreign funds, treating all incomes from their investments in the stock market in India as capital gains.

The revised discussion paper on DTC has proposed computation of minimum alternate tax (MAT) on book profits basis. The earlier code had proposed MAT on gross assets. The revised discussion paper also makes it clear that profit-linked deductions of units already operating in special economic zones would be protected for the unexpired period. The tax proposals, which will replace the existing direct tax laws introduced decades ago, are expected to come into force in the next financial year starting 1 April 2011.

Meanwhile, many Indian firms have reportedly paid higher advance tax in Q1 June 2010. Higher advance tax payment normally indicates higher profits for the period under review. Reliance Industries (RIL) has paid Rs 653 crore, an increase of 108%, while HPCL paid Rs 61 crore, a 307% increase. Bajaj Auto paid Rs 110 crore against Rs 50 crore last year.

Infosys Technologies, the country's second-largest software company, reported an advance tax payment of Rs 275 crore, compared to Rs 230 crore in the previous year. TCS paid Rs 128 crore in advance taxes in Q1 June 2010, up 142% from Rs 53 crore it paid in the April-June period last fiscal.

The country's top consumer goods company Hindustan Unilever paid Rs 75 crore, the same as last the last fiscal year. Advance tax payments by companies during the April-June quarter account for 15% of the total advance tax payable in the fiscal year

The country's top pharmaceutical companies have also paid higher taxes, with GlaxoSmithkline Pharma paying Rs 42 crore against Rs 39 crore in the year-earlier period and Ranbaxy's payments rising to Rs 17.5 crore from Rs 15 crore.

The banking sector was a mixed bag during the quarter. The country's largest bank State Bank of India (SBI) paid Rs 860 crore against the Rs 1170 crore it paid a year before. Union Bank of India's advance tax payments rose to Rs 168 crore from Rs 104 crore, while ICICI Bank paid Rs 350 crore, the same as it paid in the last fiscal.

Housing finance major HDFC has paid advance tax of Rs 215 crore in Q1 June 2010 verses Rs 175 crore in Q1 June 2009. Private sector lender HDFC Bank has paid advance tax of Rs 315 crore in Q1 June 2010 versus Rs 250 crore in Q1 June 2009.

Mahindra and Mahindra paid Rs 63 crore, up 270.5%, and Tata Motors paid Rs 65 crore, more than double last year's outgo. Steel Authority of India (SAIL) paid Rs 362 crore against Rs 344 crore a year before, while Gas Authority of India paid Rs 280 crore against Rs 250 crore. Ambuja Cement's advance tax payment dipped marginally to Rs 65 crore from Rs 70 crore

European market extended gain for the six day on Wednesday, tracking overnight rally on Wall Street, where the S&P 500 moved above its 200-day moving average. The key benchmark indices in UK, France and Germany rose by 0.39% to 0.59%.

Asian stocks extended recent gains as a report showing growth in New York manufacturing boosted confidence that a recovery in world's biggest economy will increase corporate earnings. The key benchmark indices in Indonesia, Japan, South Korea, and Singapore were up by between 0.91% to 1.81%. Markets in China, Hong Kong and Taiwan were closed for the Dragon Boat Festival holiday.

US markets stocks rallied on Tuesday as the euro gained against the dollar after a number of successful European debt auctions eased investor concerns about the euro zone's solvency crisis. The Dow Jones Industrial Average advanced 213.88 points or 2.15% at 10404.77. Standard & Poor's 500 rose 25.6 points or 2.35% at 1115.23 and the Nasdaq Composite gained 61.92 points or 2.76% at 2305.88.

In economic news, the New York Federal Reserve's Empire State Index climbed to 19.6 in June 2010 from 19.1 in May 2010.

Trading in US index futures indicated the Dow could fall 33 points at the opening bell Wednesday, 16 June 2010.

Back home, the collection of indirect taxes, which include customs, central excise and service tax, jumped 49% to around Rs 35,000 crore during April-May 2010 from a year ago period on the back of industrial buoyancy. The government proposes to raise the collection of indirect taxes by 29% this fiscal ending March 2011.

Global rating agency Fitch, early this week, raised India's local currency rating outlook to stable from negative as the rating agency forecast a decline in government debt to GDP ratio to 80% by March 2011 from 83% at the end of March 2010. It also upgraded India's growth forecast to 8.5% in the year to March 2011 from earlier forecast of 7% growth.