Reduction in Corporate Tax to Revive Growth; Manufacturing Companies to Benefit the Most

• The corporate rate has been slashed to 22% if companies choose not avail exemptions and incentives. The effective tax rate would be 25.17% after including all surcharges. Also, these companies would not be required to pay Minimum Alternative Tax (MAT).
• Push to Make-in-India: Domestic companies incorporated on or after October 1 and are making fresh investments in manufacturing are allowed to pay 15% tax if the exemptions are not availed. The companies must commence production before the end of FY23. In addition, they are not required to pay MAT.
• Companies seeking exemption and incentives can pay MAT of 15%, which was earlier 18.5%.
• The sale of equity shares and equity-oriented mutual funds will not attract additional surcharge on capital gains tax for individuals and HUFs. Earlier, individuals earning Rs 2-5 crore and those earning more than Rs 5 crore had to pay a surcharge of 25% and 37%, respectively. Now, this has been revised and a higher rate of surcharge shall not apply on capital gains.
• Companies now have permission to use 2% CSR spending on incubators funded by IITs, NITs, national laboratories, and autonomous bodies.
• Tax on share buyback will not be levied for those listed companies that made the announcement before July 5.
• These new measures will have an impact of Rs 1.45T on government’s exchequer on an annual basis.

Implications:

• Capex to increase: With the reduced taxation, companies’ bottom line is expected to improve significantly, depending on the tax benefit they receive. The increased earnings can be utilized for increasing their capex.
• FDI and FIIs inflows to increase: The tax cut will make India competitive to Asian countries. Foreign companies might take this opportunity to invest aggressively in India.
• Economy to revive: As there is a push from both the monetary and fiscal side, the economy is likely to revive. Currently, repo rates are at a nine-year low of 5.4%.
• Revival of the Sectors: With effective tax being lowered, companies operating in the higher tax bracket will make the most of the benefits (such as private banks which, on average, attract tax of 33-35%). Apart from banking, sectors such as Auto and Cement are set to reap the benefits through a recovery in the capex cycle.
• Impact on fiscal deficit: During FY20 budget announcement, the government targeted fiscal deficit of 3.3%, a reduction of 10bps from last year. It estimated it will collect revenue of Rs 24.5T. Today’s announcement will reduce the revenue to the exchequer by Rs 1.45T, and as a result, the fiscal deficit target might be missed. However, the government’s other initiatives like disinvestments in public-sector companies can make up for it with a boost in non-tax revenue.