Effective tax rate

Tax expense divided by profit before tax, as reported.

A company charging ₹205 crore on ₹820 crore of pre-tax profit has an effective rate of 25%.

It differs from the statutory rate for reasons disclosed in a reconciliation note: exempt income, disallowed expenses, tax holidays, losses carried forward, and differences between jurisdictions for a group with foreign operations.

A rate that is persistently far below the statutory one deserves an explanation, because the benefit usually has an expiry date and the model should say when.

Use the marginal rate for valuation and the effective rate for forecasting near-term cash tax.