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After tax reduction, corporate demanding growth

The income tax rate for companies has been slashed by almost 10 percent points to 25.17 percent. The new manufacturing firms can avail the lower rate to 17.01 per cent.

The recently announced corporate tax reduction by Finance Minister Nirmala Sitharaman have converted into a big surprise for the Indian economy that has been struggling with growth deceleration.

Nirmala Sitharaman, Finance Minister, Government of India

According to the report, the government has cut the corporate tax rate for domestic companies to 22 per cent (inclusive of all cess and surcharges) for domestic companies from the existing 30 per cent.

What’s more, new domestic manufacturing companies, incorporated after October 1, will be asked to pay only as little as 15 percent provided they start manufacturing by 2023 – that is, a year before the next general elections.

Finance Minister Nirmala Sitharaman mentioned that the reduction in tax rates has been done by spreading an ordinance to an amendment to the Income Tax Act.

While showing his happiness on social networking site, PM Narendra Modi tweeted, “The step to cut corporate tax is historic. It will give a great stimulus to #MakeInIndia, attract private investment from across the globe, improve competitiveness of our private sector, create more jobs and result in a win-win for 130 crore Indians.”

After reviewing the tax rates, there are mixed reactions coming from different industries. But according to few experts it is not in favour of anyone.

“I am not sure how lower tax rates would incentivise companies to increase the capex when private consumption engine has lost steam. We need to wait and watch. These broad-brush measures should be complemented with sector-specific corrective measures to restore investor confidence. However, these measures will have a positive impact on the sentiment”, said Rupa Rege-Nitsure, group chief economist, L&T Finance Holdings

The famous senior economist Suvodeep Rakshit, Kotak Institutional Equities feels that it is a prudent move to reduce the corporate tax rates because it increases the retained earnings of the companies and forms the investible surplus for future.

“On the other side, it will negatively impact the bond market as the revenue forgone due to the tax rate reduction will make it difficult to stick to the GFD/GDP budgeted target”, he added.

The impact of the various tax provisions:

Industries benefits

The growth rate in manufacturing has reduced from 12 percent in Q1 FY19 to just 1 percent in Q1 FY20. May be this modification in tax rates will revive demand across industries and put the economy back on the growth track. The impact on various sectors would differ in terms of how they plan to utilise this fiscal bonus. This could range from reviving investment, lowering prices to increase demand, paying out higher dividends or repaying debt.

FMCG may benefits growth

If we check according to the recent tax changes, FMCG companies on the Nifty (ITC, Nestle, Britannia, HUL), would see their effective tax reducing from 29-35 percent to 25 percent, leading to retention of a cumulative Rs 2,000 crore earnings on the basis of FY19 numbers. This corresponds to 9 percent of net earnings for FY19.

Banks can also get benefits

According to Finance minister, a new domestic company incorporated on or after October 1, 2019, will pay income tax at the rate of 15 percent. This comes with a rider that production should commence before March 31, 2023. We believe that the move can hasten the private capex cycle and if this happens, credit growth will rise and banks would be key beneficiaries.

However, government borrowing will also go up to make up for the revenue foregone by reducing the tax rate. This in turn would exert upward pressure on interest rates. In total, therefore, it will have a mixed impact on banks.

Tax reduction can refuel demand in auto sector

The tax rates reduction may give profit to auto industry. Not only that it, may help companies pass on the benefits to the customers in terms of discounts and freebies ahead of the festive season, which may boost demand.

Additionally, the industry is waiting for a GST rate cut on automobiles, which if it comes through would significantly boost demand. However, the GST fitment committee has ruled out GST cut for automakers.

While emphasizing the importance of investment and growth, Finance Minister said, the revenue foregone on reduction in corporate tax and other relief measures would amount to Rs 1.45 lakh crore annually.


Nitisha Dubey

I am a Journalist with a post graduate degree in Journalism & Mass Communication. I love reading non-fiction books, exploring different destinations and varieties of cuisines. Biographies and historical movies are few favourites.

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