FM’s corp tax cut magic really worked 

Stock markets witnessed biggest one day gain in ten years

NEW DELHI: The Finance Minister Nirmala Seetharaman, who seemed to have taken on the sole responsibility to revive the corporate world that has turned its back to the Central budget presented by the Finance Minister on July 5.

The cut in the corporate tax from 30 per cent to 22 per cent has really moved the needle in the stock markets, which witnessed the biggest single day gain in the past 10 years.

The cut in corporate tax rate is expected to give big relief for 7 lakh-odd companies in the non-manufacturing segment that have been paying an effective tax rate of about 30 per cent.

At the same time, for the 1.3 lakh manufacturing companies, whose effective tax rate is currently about 27.8 per cent, the relief is relatively small.

On a general note, the tax rate for all corporates has been reduced from 30 per cent earlier to 22 per cent now or to be precise, taking into account the surcharge and education cess, the effective tax rate is down from 34.94 per cent to 25.17 per cent.

However, it is argued that the companies in the automotive or pharmaceuticals sectors may see lower gains as the effective tax rate is already about 24-25 per cent due to various exemptions the companies avail currently.

The stock markets responded positively to the corporate tax relief measures announced on Friday (September 20), sending the benchmark indices to close with the biggest single-day gain in the last 10 years. The surge in the stock markets saw the investors growing richer by Rs6.83 lakh crore as Sensex gained 1921 points and the Nifty adding 569 points on Friday alone.

 

The tax cut this time has been viewed as a master stroke by the Finance Minister, who had made other three announcements in the past few weeks with a hope to give a leg-up to the sagging market. On August 23, the FM announced a roll back of the tax surcharge on Foreign Portfolio Investors (FPI). Again, exactly after a week, on August 30, the FM announced merger of various government owned banks.

On September 14, Seetharaman chose to announce packages to revive the exports and real estate markets, a move that has been hailed by the market as meaningful steps from the Government side, especially the decision to set up an Alternative Investment Fund (AIF) to finance incomplete real estate projects for want of funding.

The FM’s tax relief has also been aimed at encouraging fresh investments in manufacturing.  For the new companies to be incorporated on or after October 1, 2019 that make fresh investments in manufacturing, the tax rate has been cut to 15 per cent from the current 25 per cent.

The effective rate inclusive of surcharge and cess will come to around 17. Moreover, these companies will also not have to pay Minimum Alternate Tax (MAT). The new move also has the MAT rate reduced to 15 per cent from the existing 18.5 per cent for those companies which continue to avail of exemptions.

IT companies that currently pay less than 25 per cent effective tax rate will benefit from the MAT reduction, if they continue to avail of exemptions.

On the flip side, the cost the government will be paying for the new tax relief package will be in the region of Rs1.45 lakh crore, though the government can boast that the country’s corporate tax regime will now be aligned with that of the major economies, which in turn will help attract fresh investments into the country.

The move has been viewed by leading rating agencies as credit negative for the country but credit positive for the corporates. According to experts in public finance, the move will have a negative impact on the country’s fiscal deficit and this has already started manifesting in the increase in the benchmark bond yields.

 

 

 

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