Cut in corporate tax will fuel investment and allow companies to give better dividends
India Inc has wholeheartedly welcomed Finance Minister Nirmala Sitharaman's announcement to cut corporate tax to 22 percent.
"Looks like Diwali has come early," tweeted Mahindra & Mahindra's Managing Director Pawan Goenka. And, his peers across industries will agree even as the markets gave a 1,900 point salute.
The move will bring down the effective corporate tax rate after surcharge to 25.17 percent. The most immediate impact will be improving the overall sentiment, allowing more cash in the hands of companies to re-invest in their capacities, and for investors - possibly better dividends.
"Money available for reinvestment and paying better dividend will be there. You can plough back money and make the company stronger because only 25 percent goes in taxes. It is a great boon," Deepak Parekh, Chairman - HDFC, told Moneycontrol in an interview.
This will be important as growth in manufacturing sector had hit a 15-month low in August, with companies struggling under subdued demand and price slump. While auto companies cut production and lay off employees, steelmakers went on a shutdown mode.
"As an economy we needed a large stimulus and we believe that this should be the trigger for the change in the mood that was desperately needed,” added Bhargav Dasgupta, MD & CEO - ICICI Lombard General Insurance.
The push for manufacturing sector is especially important for creation of jobs, lack of which has been a major pain point for the economy.
"The measure is expected to have positive impact on job creation. Overall, it can light up the animal spirits of Indian entrepreneurs,” said Pramod Menon, Group CFO, RPG Enterprises.
Boost for fresh investments...
Sitharaman's another boost was for new manufacturing units.
To attract investment in manufacturing, local companies incorporated after October will pay tax at the rate of 15 percent. The effective tax for these new companies will be 17.01 percent, including cess and surcharge.
“The 15 percent tax for new manufacturing set-ups will encourage new investments pretty quickly,” said A Balasubramanian, MD & CEO - Aditya Birla Sun Life AMC.
"This is going to propel the capex growth," added Santhanam Subramanian, CFO of Aurobindo Pharma.
State Bank of India Chairman Rajnish Kumar pointed out that the move will boost interest from multinational companies. "The move to incentivise setting up new manufacturing units in India comes at the most opportune time for foreign companies who could be actively looking for opportunities to invest globally!" said Kumar.
One of the sectors benefiting from the move will be the pharmaceuticals sector, which depends heavily on the exports market.
For Indian pharma companies, at 15 percent tax rate on new manufacturing units - they will be on par with China's tax rate of around 16 percent. China, with its low tax rate and liberal financing, has been adding huge capacities to take on Indian companies in export markets.
In FY19, Indian pharma crossed $19.2 billion exports and registered a 10.72 per cent growth compared to FY 18, according to Pharmexcil. Pharmexcil expects similar growth in FY20.
... and consumption
The cut in tax, along with government's push to improve availability for retail credit, will help drive consumption.
"The overall demand scenario would improve across sectors as the government has directed public sector banks and NBFCs to increase retail credit," said Vijay Mansukhani, Managing Director of MIRC Electronics (Onida).
This, he said, will boost the consumer spending during this festive season and will have a good positive impact on consumer durables like LED TVs, televisions, air conditioners and washing machines.
Talking about the impact on the NBFC sector, Piramal Group Chairman Ajay Piramal said, "Surplus funds available to companies will be invested in capex and talent. The NBFC sector will save between Rs 250 - 300 crore that can potentially be redeployed as loans."
The contrary view
While the reform is bold, and has taken companies by surprise, not everyone agrees about the impact.
"The reduced tax is on profits. But companies at present are struggling to make profits. A cut on corporate tax wont automatically lead to higher consumption, it won't spur people to buy cars, TVs, houses or travel more. That push will only come with a cut in GST," said Mark Martin, Founder, aviation consulting firm Martin Consulting.
"The market's reaction is knee-jerk. And it's the result of some bulls having a field day," he added.
At the same time, Rohit Jain, Partner at law firm Economic Law Practice opines that the move makes for a positive market sentiment. "This will help get foreign investors to come into the country."
While the impact of this booster dose will be something to look out for, more of these will be needed.
Need for more doses
Corporate titans have called upon the government to continue with its reforms to push sentiments and growth.
“ I only wish more such steps, which government is already contemplating, could be taken together in one go like tapping NRI investments, with this one so as to create deeper impact, instill more confidence in economy and amongst corporates," said Gopichand P. Hinduja, Co-Chairman - Hinduja Group.
"This would certainly help put businesses back on track, generate more employment and most importantly, keep India as the principal investment destination amidst global slowdown," he added.
Hitesh D Gajaria, KPMG's Partner and co-head of Tax, added that the next follow-through steps eagerly awaited were moving the tax on dividends to shareholders and freeing companies from the Dividend Distribution Tax burden.
With inputs from M Saraswathy, Viswanath Pilla, Swaraj Baggonkar, Parnika Sokhi, Prince Mathews ThomasThe Great Diwali Discount!
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