The rules of the game
Industry analysis is incomplete without knowing the regulatory framework, because even small changes can have a big impact. The syllabus's examples: the whole debate on FDI in multi-brand retail turned on how much retailers must invest in back-end infrastructure, what counts as back-end infrastructure, whether they may buy existing set-ups and how much they must source from Indian vendors; changes in environmental policy closed mines; cancellation of telecom licences hit that industry; the latest amendments to the Companies Act changed the landscape for doing business in India. Analysts must pay attention to regulation.
Taxes as revenue and as steering
Taxes earn the government income to meet its expenses, but governments also use them to encourage or discourage businesses. Kerala introduced a fat tax in 2017, an additional 14.5% on junk food, to discourage that industry. Nationally, GST has several slabs: essentials at nil or low rates, luxury goods much higher.
| Direct taxes | Indirect taxes | |
|---|---|---|
| Incidence | The person who bears the tax is the one liable to pay it to the government | The person bearing the tax differs from the person liable to collect it and remit it |
| Example | Income tax on individuals and businesses | GST: levied on the seller, collected from the customer, so the end consumer bears it |
Direct tax and its four components
Tax law prescribes how and when income and expenses are recognised, sometimes to steer behaviour: to promote research, companies may deduct 1.5 times the actual expenditure on certain scientific research; to discourage delayed interest payments to scheduled commercial banks, such interest is deductible only when actually paid. These adjustments make book profit differ from taxable profit, which appears as a deferred tax asset (paying more tax today, so future taxes reduce) or a deferred tax liability (paying less today, so future taxes rise). Because direct tax is a steering tool, tracking changes is critical to an industry's growth outlook.
- 1Income tax: Indian companies pay 30% of taxable profit (25% if total turnover was below 400 crore rupees in a financial year). Alternative schemes let a company pay a reduced rate, from 15% to 25% depending on when it was established and which scheme it opts for, in exchange for forgoing certain expense deductions available under the Income Tax Act.
- 2Minimum Alternate Tax: if income tax payable is less than 15% of book profits, the company pays 15% of book profits plus 4% cess and applicable surcharge. The excess so paid becomes MAT credit, set off against future tax to the extent it exceeds MAT in that year.
- 3Surcharge: a tax on tax, charged on the income tax or MAT. Income tax revenue is shared with the states where companies are located; surcharge goes entirely to central government funds. For assessment year 2025-26 (financial year 2024-25) it is 12% of tax payable if total income exceeds 10 crore rupees, 7% between 1 crore and 10 crore, and nil below 1 crore.
- 4Cess: an additional levy on tax plus surcharge, earmarked for a specific purpose; an education cess can be spent only on education. For assessment year 2025-26 the total cess is 4%, for health and education.
A company with taxable profit of 100 crore at the 30% rate owes 30 crore of income tax. Its total income is above 10 crore, so surcharge is 12% of 30 crore, which is 3.6 crore. Cess is 4% of (30 + 3.6), which is 1.344 crore. Total outgo is 34.944 crore, an effective rate near 35%. If instead the company had used deductions to bring its tax below 15% of book profits, MAT would apply at 15% of book profits plus cess and surcharge, and the excess over regular tax would become MAT credit.
Indirect taxes
India brought in GST to combine its many indirect taxes and remove the others, though fossil fuels and liquor still sit under the old excise and VAT system.
Other taxes that shape industries
The 15% MAT floor is measured against book profits, the accounting number, while regular income tax is charged on taxable profit. A company can have a large book profit and a small taxable profit after deductions; that gap is exactly when MAT bites, and the extra becomes a credit for later.
- Small regulatory changes have big effects: the FDI in multi-brand retail debate (back-end investment, buying existing set-ups, minimum sourcing from Indian vendors), mine closures from environmental policy, cancelled telecom licences, Companies Act amendments.
- Taxes raise revenue and steer behaviour (Kerala's 2017 fat tax of 14.5% on junk food; GST slabs low on essentials, high on luxury). Direct taxes fall on the person who pays them (income tax); indirect taxes are borne by one person and collected by another (GST, where the end consumer bears it).
- Corporate tax has four parts: income tax at 30% (25% if turnover was under 400 crore; optional schemes at 15% to 25% for giving up deductions), MAT of 15% of book profits plus 4% cess and surcharge when tax falls below that, with MAT credit against future tax; surcharge at 12% above 10 crore income, 7% between 1 and 10 crore, nil below (kept entirely by the centre); cess of 4% for health and education. Tax and book differences create deferred tax assets or liabilities.
- GST is charged on invoice value at 0% to 28% (most at 18%) with input credit to avoid double taxation; fossil fuels and liquor stay under excise (a production tax) and state VAT; customs applies to imports. Road tax hits autos and their ancillaries and insurers, stamp duty hits real estate and investment firms, STT discourages short-term trading and hits brokers.