Information technology (IT) sector stocks have remained mere witnesses to the greatest bull run in the history of Indian equity market. In fact, they have moved in opposite direction in last two trading days. IT sector stocks have been falling since Friday as reduction in corporate tax rate for the sector is insignificant. Benefits of the tax cuts will be greater for companies which generate majority of their revenue at home and don't avail of many operational exemptions. However, IT sector is export driven and already enjoys lower tax incidence due to exemptions.
Sunil Tirumalai, Head of Research at Emkay Global Financial Services said, "Indian IT companies, barring Infosys which pays effective tax rate (ETR) of 27% among the Tier I techs, already pay an ETR of less than 25.2%. This is a composition of higher taxes paid in onsite locations generally and lower taxes paid on offshore delivery from India. The reduction in MAT rate from 18.5% to 15% will have a marginal impact on the tax paid on offshore profits generated out of SEZ delivery units."
Subsequently, IT indices slipped in comparison to a spectacular equity market rally in last two trading sessions.
While Sensex has gained 2,996 points since Friday, Nifty has seen a rally of 895 points in two days. BSE IT index has slipped 694 points during the same period. The index which opened at 15,761 on Friday fell to 15,067 level today. Nifty IT index too has lost 457 points to 15,040 level today. It opened at 15,497 level on Friday. Among 19 BSE sectoral indices, IT sector has been the sole loser in both trading sessions.Today, BSE IT index closed 3.29% or 512 points lower at 15,067 level compared to the previous close of 15,579. Similarly, Nifty IT index lost 450 points or 2.91% to trade at 15,040 in today's trading session.
Mustafa Nadeem, CEO at Epic Research said, "IT stocks will not benefit from the current reduction in corporate tax rates as they already enjoy various exemptions under the SEZ Scheme. Secondly, only a few companies who have announced their share buyback before July 5 will benefit from a 20% tax exemption announced by FM Nirmala Sitharaman in Budget 2019. The benefit of reduction in corporate tax will benefit domestic players who earn major portions of their bottom line from India. This move may not benefit IT companies since they have major portion of their services delivered outside India."
Infosys was the top Sensex loser today falling 4.97% to Rs 766.30. It slid up to 7.83% to Rs 742.1 on BSE. Similarly, Tech Mahindra and TCS lost 2.68% and 2.46% on Sensex, respectively.
Wipro, which moved out of Sensex on December 24, fell 2.34% or 5.75 points lower at Rs 240 on BSE today. But on Friday the stock climbed 4.25 points or 1.76% to Rs 245.95 after FM Nirmala Sitharaman announced that listed companies which have already made a public announcement of buyback on or before July 5, 2019 would be exempted from tax on buyback of shares.
Wipro and Infosys stand to gain from this announcement in the long term. The government introduced buyback tax of 20 percent in Budget 2019. On April 16 this year, the Wipro board cleared buyback of up to 32.31 crore equity shares for consideration of up to Rs 10,500 crore at Rs 325 apiece. The IT firm carried out the buyback process on August 14 which closed on August 28 this year.
Infosys also carried out a buyback in March this year and bought back 11.05 crore of its shares under its Rs 8,260-crore buyback offer. However, the IT stock closed 1.94% lower at Rs 805.10 compared to previous close of Rs 821 on Friday.
Edited by Aseem Thapliyal