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India Inc gets big boost! Govt cuts corporate tax rate to 22% from 30%

All these moves would cost the government exchequer Rs 1.45 lakh crore. The question though is if a significant part of this money would flow as investments in the short to medium term

twitter-logo Dipak Mondal        Last Updated: September 20, 2019  | 22:17 IST
India Inc gets big boost! Govt cuts corporate tax rate to 22% from 30%

Throwing caution to the wind, the government in a desperate move to boost market sentiments and investments in the country has drastically slashed corporate tax rates from a high of 30 per cent to 22 per cent.

Announcing the rate cuts today in Goa, finance minister Nirmala Sitharaman also gave a major boost to manufacturing in the country by allowing any new domestic company incorporated on or after October 1, 2019 making fresh investment in manufacturing, to pay income-tax at the rate of 15 per cent.

The new tax rates apply to companies which do not avail of any exemptions or incentives. The government also did away with the minimum alternate tax (MAT) for the companies that do not avail exemptions and incentives, while MAT has been reduced from 18.5 per cent to 15 per cent for the ones that avail it.

All these moves would cost the government exchequer Rs 1.45 lakh crore. The question though is if a significant part of this money would flow as investments in the short to medium term.

Also Read: Corporate tax cut to cost govt Rs 1.45 lakh crore

Experts say that while the announcements would not have an immediate impact on private investments, it certainly would boost corporate earnings in the short-term.

"In the first round, the impact would be more on the corporate earnings. Since the tax liabilities would come down, corporate would either be able to maintain their profitability or even come out of loss. In the second round, the move would benefit the economy by way of attracting investments," says Sunil Kumar Sinha, principal economist, India Ratings.

Madhavi Arora, Economist, Fx & Rates, Edelweiss Securities, has similar views.  "The supply side tax reforms generally have relatively longer term economic returns, albeit impact the revenue side in the near term. Besides, the current slowdown cycle is different from the 2012-13 slowdown as the consumption demand is also significantly constrained in this cycle (unlike the last one) and thus could limit fresh investment demand in the near term," she says.  According to her, a broader tax cut covering all economic agents would have probably yielded better economic returns.

Also Read: Corporate tax cut: Uday Kotak, Kiran Mazumdar Shaw, Ajay Piramal, others welcome 'bold move'

The effective tax rate for companies availing 22 per cent tax rate would be 25.17 per cent after including the surcharge and cess. This is a sharp decline from existing 35 per cent tax rate. For the companies eligible for 15 per cent tax rate, the effective tax rate after including cess and surcharge would be 17 per cent.

Gopal Agarwal, senior fund manager and head of macro strategy, DSP BLackRock Investment Managers, said that the move would boost the earning per share (EPS) of Nifty stocks by up to 8 per cent. He says in the long-term, the announcement is going to boost investments as any rate cuts has three times multiplier effect on investments.

Meanwhile, global brokerage Morgan Stanley has revised earnings estimate for 30 Sensex companies. It has estimated Sensex FY20 earnings per share growth at 25 per cent from 13 per cent earlier.

The impact of the tax cuts is huge given that the effective tax rates for companies are between 26 per cent and 29 per cent even after factoring in the exemptions.

Tax experts say that the headline rates - 22 per cent and 15 per cent - is now much lower than the effective tax rates and hence would make Indian tax rates competitive with other countries.

The revenue loss due to the rate cuts is Rs 1.45 lakh crore, which is 0.8 per cent of the GDP, and therefore, would breach the government's fiscal deficit target of 3.3 per cent. However, experts say it can partially be nullified by expenditure cuts.

Also Read: India Today Conclave: 'There is a slowdown, but India will come back,' says RBI Governor Shaktikanta Das

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