The reduction in corporate tax will help companies correct their balance sheets, thereby improving access to capital and thus kick-start the investment cycle, said a senior executive at RPG Enterprises.
At RPG Enterprises itself, the reduced tax rate will help advance some of the capital expenditure that was otherwise pushed to next year, Pramod Menon, Management Board Member & Group Chief Financial Officer, told Moneycontrol.
The Group includes the infrastructure-focused KEC International, tyre maker Ceat, IT company Zensar and RPG Life Sciences.
Finance Minister Nirmala Sitharaman on September 21, had reduced corporate tax to 22 percent , with the new effective corporate tax at 25.17 percent.
"A lot of balance sheets were stressed. The lower tax will now give companies some breathing space by giving them more cash in hand. This will help ease their covenants and better the debt servicing ratios," said Menon.
This, the finance veteran said, will bring back the confidence among financial institutions, who were till now risk averse. "If you start getting prettier balance sheets, then risk taking appetite gets created," said Menon.
Defaults by non-banking financial institutions, a slump in growth of manufacturing sector and with uncertainty clouding the financial markets, investments had dried up.
"There was a crisis of confidence. The spread between a AAA-rated company and AA rated company had increased. While a AAA-rated company should typically be raising money at 7 percent, was able to do so for 6.75 percent. On the other hand, the AA-rated firms should have been able to raise money at 7.5 percent, but were getting only at 8 percent. For those rated below, there was no money," described Menon of the scenario that was prevailing.
The change in corporate tax, he said, is a confidence booster that will increase access to funds, and thereby kickstart investments.
To attract investment in manufacturing, the Finance Minister said that 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 incentive will apply only if the project gets over by March 2023.
"That is a good window to have. This will spur companies who were sitting on the hedge when it came to investments," said Menon.
And because of the window, the incentive will prompt companies to quickly act to meet the deadline criteria. "The timeline is enough to at least complete the first or the second phase of a project," said Menon.
Impact on RPG companies
The Harsh Goenka-led RPG Enterprises consists of over fifteen companies, with a turnover in excess of $3 billion. KEC International is the biggest of them.
"KEC didnt have any tax shields and have the high end of the effective tax rate," said Menon. With the lower tax rate, added Menon, KEC's effective tax rate will come down by 8-9 percent.
Ceat, which had announced a capex of Rs 4,000 crore over three years, had also talked about the possibility of delaying the investment by about a year. But now, with the lower corporate tax, the company will go ahead with the capex plan.
Lower tax rates are a confidence booster, said Menon.