New Delhi, Sept 22 : The government’s big announcement of a cut in corporate tax will benefit sectors such as banking and FMCG but IT and pharma may not see any tangible benefits as their current effective tax rate is lower, ICICI Direct Research said in a report. “Like a bolt from the blue, the government (on September 20) announced a reduction in the corporate tax rate from close to 35 percent to 25.17 percent thereby fulfilling its key agenda of implementing the Direct tax Code (DTC). This is a massive trigger for revving up growth and, more importantly, resurrecting sentiments that were down in the dumps,” the report said.
The immediate benefit is increased cash flows to corporate India that will be either channelised into debt reduction or incremental investments in increasing capacity. Also, taxing new production facilities (that come up by 2023) at 15 percent will enable attraction of global capital and spur a beleaguered investment cycle, it said. “From a granular perspective, sectors like banking and FMCG are expected to grow at a CAGR of 48.2 percent and 18 percent, respectively vs. earlier CAGR of 42.2 percent and 12.2 percent. On the flip side, sectors like IT and pharma are not expected to see any upgrades on account of existing lower tax rates,” it said. A new provision has been inserted in the Income-Tax Act with effect from FY20 which allows any domestic company the option to pay income tax at 22 percent subject to the condition that they will not avail any exemption/incentive. The effective tax rate for these companies shall be 25.17 percent inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax. In order to provide a boost to ‘Make-in-India’ initiative of the government, a new provision allows any new domestic company incorporated on or after October 1, 2019 to make fresh investment in manufacturing, an option to pay income tax at 15 percent.
This benefit is available to companies that do not avail any exemption/incentive and commences their production on or before March 31, 2023.The effective tax rate for these companies shall be 17.01 percent inclusive of surcharge and cess.Giving a sectoral analysis of the impact of tax cut, ICICI Direct Research said domestic auto equipment makers will tend to benefit from the tax cut. “Commercial vehicle manufacturers will tend to gain from the kick starting of the private capex cycle.” “Overall, banks in our coverage are expected to report 11-13 percent increase in PAT, leading to 1-3 percent increase in adjusted book value (ABV). Large private banks remain major beneficiaries with HDFC Bank reaping larger gains,” it said.
