How Nirmala Sitharaman’s corporate tax cut will benefit sectors?
New Delhi, Sep 22: In an effort to boost the economy's waning spirits, finance minister Nirmala Sitharaman on Friday cut corporate tax rates and offered a host of tweaks that will reduce India Inc's financial burden.
Industry said these measures will awaken animal spirits in the economy that saw growth drop to a six-year low of 5% in April-June quarter.
Over the last month, the government has announced a number of measures to lift growth and revive sentiments, as criticism mounted amid job losses and falling demand.
Announcing the package, termed as a mini-budget by economy watchers, Sitharaman said tax cuts had been carried out by promulgating an ordinance to amend the Income Tax Act, bringing the tax rates on a par with competing Asian peers.
But will this help all major companies?
According to ICICI Direct Research report, the government's big announcement of a cut in corporate tax will benefit sectors such as banking and FMCG but IT and pharma may not see any tangible benefits as their current effective tax rate is lower.
The immediate benefit is increased cash flows to corporate India that will be either channelised into debt reduction or incremental investments in increasing capacity.
Also, taxing new production facilities (that come up by 2023) at 15 percent will enable attraction of global capital and spur a beleaguered investment cycle, it said.
A new provision has been inserted in the Income-Tax Act with effect from FY20 which allows any domestic company the option to pay income tax at 22 percent subject to the condition that they will not avail any exemption/incentive.
The effective tax rate for these companies shall be 25.17 percent inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax.
In order to provide a boost to 'Make-in-India' initiative of the government, a new provision allows any new domestic company incorporated on or after October 1, 2019 to make fresh investment in manufacturing, an option to pay income tax at 15 percent. This benefit is available to companies that do not avail any exemption/incentive and commences their production on or before March 31, 2023.
The effective tax rate for these companies shall be 17.01 percent inclusive of surcharge and cess.
Giving a sectoral analysis of the impact of tax cut, ICICI Direct Research said domestic auto equipment makers will tend to benefit from the tax cut. "Commercial vehicle manufacturers will tend to gain from the kick starting of the private capex cycle."
"Overall, banks in our coverage are expected to report 11-13 percent increase in PAT, leading to 1-3 percent increase in adjusted book value (ABV). Large private banks remain major beneficiaries with HDFC Bank reaping larger gains," it said.
In the capital goods space, the companies have effective tax rates from 25-34 percent. The corporate tax cut will have significant positive impact on the mid-cap companies, it said.
With power utilities being mostly regulated in nature wherein any cost benefit or inflation is a pass through in the tariffs, the reduction in MAT tax rate from 21 percent to 17 percent will have a negligible impact in the profitability as the tax savings will be pass through in the form of lower tariffs.
While cement companies, which currently have higher tax rates would benefit significantly from the reduction, only a few players would benefit in the construction sector, it said.
Consumer durable companies pay effective tax of between 25 percent and 35 percent and the cut would benefit most of them.
"FMCG companies are expected to witness 5-12 percent increase in earnings on the back of corporate tax reduction. More importantly, the possibility of passing on this benefits and propelling the volume growth would be on the cards," it said. "We believe FMCG companies would be passing on the benefit in terms of price reduction, which would result in increase in demand specifically in rural India."
However, with government fiscal under pressure, the possibility of further increase in GST/cess on cigarettes is high, it said.
ICICI Direct Research said effective tax rate in case of most pharma companies is either below or at par with the new tax rate due to special economic zone (SEZ), tax free zone benefits, unused MAT credit besides R&D benefits.
Hotels, logistics and liquor as well as metal and mining sectors would benefit from the reduction, it added.
This may also help India attract some investments that are looking to shift out of China following the country's spat with the US and also bring back investment in sectors like textiles that had moved to countries like Bangladesh.