Effective tax rate

The effective tax rate is the simple tip of a complicated iceberg.

The simple explanation: Thumb (or scroll) to the income statement and divide “Provision for income taxes” by “Income before income taxes” and you’ve got it. Note that nomenclature may vary, but it’s all the same thing.

 

Relative to much of the world, the Indian/ US tax and accounting rules are lengthy and complex enough to create an industry of lobbyists and loophole specialists. And while we as investors and analysts don’t need to geek out on taxes per se, it’s smart to know the principles at play.

Apart from the formula itself, the main thing to know is that the effective tax rate isn’t a company’s only tax rate. It’s part of a posse of tax rates and tax rate-related concepts that live on – and in some cases, off – a company’s financial statements, feeding into and off of each other.