Tax Rate Seems Low – Meaning

“Tax rate seems low”, means the company’s reported effective tax rate is significantly below the statutory corporate tax rate in India (which is usually ~22–25% for most companies after exemptions).

Here are the common reasons why a company’s tax rate might look unusually low:

🔹 Business- or Policy-Related

  1. Tax holidays / exemptions – Units set up in SEZs, under government schemes (like infra, renewable energy, etc.) may enjoy concessional or zero tax for some years.
  2. Lower tax regime – Some companies opt for the new corporate tax regime introduced in 2019 (15% for new manufacturing, 22% for others).
  3. MAT credits / Deferred tax adjustments – They may have accumulated tax credits from past losses or excess tax paid earlier, reducing current tax liability.

🔹 Accounting-Related

  1. One-time exceptional income – For example, sale of assets or subsidies, which are taxed differently or exempt.
  2. Deferred Tax Asset recognition – If a company suddenly recognizes past losses as deferred tax assets, the current year’s tax expense looks lower.
  3. International subsidiaries – If the company earns a lot from countries with lower tax rates (e.g., Middle East, Singapore), consolidated tax rate appears lower.

🔹 Possible Red Flags

  1. Aggressive tax planning – Use of loopholes, tax havens, or related-party structures to suppress tax outgo.
  2. Profit manipulation – If profits are overstated (before tax), the tax percentage looks artificially low.

📌 Why Screener flags it:
A consistently low tax rate (say 5–10% instead of ~25%) can either be a genuine advantage (due to incentives) or a risk (if it’s unsustainable or due to aggressive accounting). Investors should check Notes to Accounts → Tax expense breakdown in annual reports.

How to quickly check from Screener/annual report whether the low tax rate is due to government incentives (good) or accounting tricks (risky)?

Here’s a practical, quick way to figure out if a company’s low tax rate is a benefit (good) or a red flag (risky):

✅ Step 1: Check Screener Data

  1. On Screener, open the company’s page.
  2. Scroll to “Profit & Loss” section → Look at:
    • PBT (Profit before tax)
    • Tax
    • PAT (Profit after tax)
      Effective Tax Rate = Tax / PBT.

👉 If it’s consistently <10%, you need to investigate.

✅ Step 2: Go to Annual Report (Notes to Accounts)

In the “Notes to Financial Statements” → “Tax Expenses”, you’ll usually find a table that reconciles statutory tax rate (~22–25%) with effective tax rate. Look for:

  • Exempt income / Tax holidays → ✅ Good (government benefit).
  • Lower overseas tax rates → ✅ Neutral/Good (depends on geography).
  • Recognition of Deferred Tax Assets → ⚠️ Can flatter earnings temporarily.
  • Adjustment of past MAT credits → ⚠️ Not recurring.
  • Unexplained differences / large exemptions → 🚩 Possible manipulation.

✅ Step 3: Quick Screening Checks

  • Management Discussion & Analysis (MDA) → Sometimes explicitly mentions SEZ units, tax benefits, or incentives.
  • Subsidiaries list → If many are in tax-friendly jurisdictions (Mauritius, Cayman, Dubai), question sustainability.
  • Compare peers → If peers in same sector pay 20–25% but this company pays 5%, dig deeper.

✅ Rule of Thumb

  • Good: Mention of SEZ, infra status, new manufacturing unit (15% scheme), renewable energy incentives.
  • Neutral: Foreign income taxed at lower rates.
  • Risky: Deferred tax assets, unexplained adjustments, opaque overseas entities.