On sept 20th 2019 the Finance Minister surprised everybody a pleasant surprise indeed when she came out and made a series of announcements to revive a sagging economy.
This was the government’s decision to reduce the corporate income tax rate from about 30% to an effective rate of twenty 25.17% this has been an assistant amount of the Indian corporate community that they have been pointing out to the government that they are overtaxed compared to the competitive peers in China and rest of the world. The government has now gone ahead and made an announcement and it will be effective because the government has brought an excellent ordinance. This is an unusual thing this is not really all commonly seen because income tax rate changes generally are brought to the budget because this is quite amendments in the finance bill and other forms of parliament ratification by the government
Announced implementation of some of the measures that the data tax reforms committee which I submitted a report last month that it does reforms committee had submitted a report recommending a comprehensive change in India’s income tax rules and laws and one of that is soon than many of the changes that the government would make an ounce today would have been part of that report the government is also brought down the minimum alternate tax rate from eighteen point five percent to fifteen percent and the whole also announced exemption to faxes to foreign portfolio investors which means that the government has demonstrated to the world that India should remain a preferred.
so far as foreign portfolio investment is concerned so basically the government
It does just ahead off the festive season by of the festive season this is nothing short of an early do what do I leave for the Indian corporate community but in the mean that some community that has been asking the government for set of measures a set of measures to revive the broader economic we now have to wait and see what the government goes ahead and does for individual income tax rate one would assume that individual income tax rates and changes would come in the budget that the government’s going to present in February next year.
The manufacturing growth rate has declined from 12 percent in Q1 FY19 to just 1 percent in Q1 FY20. We believe that revision in tax rates should 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 utilize this fiscal bonus. This could range from reviving investment, lowering prices to increase demand, paying out higher dividends or repaying debt.
FMCG companies may pass on tax benefits to boost volume growth
For FMCG companies, the tax cuts would result in more cash in hand, which could be utilized for spurring demand through trade discounts in the upcoming festival season. To give an estimate, 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 based on FY19 numbers. This corresponds to 9 percent of net earnings for FY19.
Credit cycle can get a boost and benefit banks
The finance minister said 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 sum, therefore, it will have a mixed impact on banks.
The tax measures could particularly help accelerate investment in chemical and pharma APIs (active pharmaceutical ingredients) business lines as they position themselves for import substitution strategies.
Tax reduction can refuel demand in the auto sector
The Indian automobile sector, which contributes 7.5 percent to the country’s gross domestic product (GDP) and 49 percent to manufacturing GDP, has been under the weather for almost a year on the back of multiple headwinds the industry is facing.
Factors such as non-availability of retail finance, liquidity crunch and slowdown in economic activities have hurt demand. But the biggest reason for the lack of demand has been the increase in the total cost of ownership led by mandatory long-term insurance and implementation of safety regulations.
How will the tax cuts help the sector? The reduction in tax rates would improve the profitability of companies in the auto industry, but more than 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. Moreover, the move would make more liquidity available to the companies for further investment.
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.