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Using 'Tax' for screening great stocks


Using 'Tax' for screening great stocks
Tax planning is often used to increase the effectiveness in terms of wealth creation. But perhaps its not a good idea to consider companies for long-term investing that employ such tactics for increasing net profit.

This is true especially when the central government is considering to increase the corporate tax collection by looking at companies which do not pay taxes.


As companies which are already paying high corporate taxes will not come under the government's scanner, they should make an interesting buy at the right price.

The government has decided to increase the Minimum Alternate Tax (MAT) rates, the companies will also not get an extention of benefits under the Software Technology Park of India (STPI), plus it intends to impose MAT on companies that have set up operations under the special economic zones (SEZ).

In simple words, the tax liabilities of companies -- with very low tax payouts -- will increase.

Further with the Direct Taxes Code (DTC) put in practice, liability side of the companies is expected to rise further. As one expert put that with the once MAT and DTC are implemented, tax rates for companies which pay low taxes is likely to increase by 25%.

Though, a helpful criteria but this is not the only thing to look for. It is important to see the increase in sales and the status of the free cash-flow of the company.

With all of these positives, the company's stock price should also be taken into account. That is why it is imperative that a number crunching is done properly. Also make sure that the companies have been traded on at least 80% of the trading days and their average monthly volumes is more than 1,00,000 shares. This will ensure that the companies are liquid making it easy to buy and sell the stocks.


OneIndia Money

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Story first published: Monday, July 4, 2011, 11:58 [IST]
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