Bay Founder & CIO views: Markets cheer corporate tax cut

September 20th, 2019

The S&P BSE Sensex jumped 2,284.55 points on Friday in intra-day trade led by a slew of measures finance minister Nirmala Sitharaman announced on Friday morning to boost growth and investment, the highlight of which is a steep cut in corporate tax. This is the highest intra-day gain the index has seen in a decade.

The last time the 30-stock benchmark index saw a similar gain was on May 18, 2009, when the United Progressive Alliance returned to power. The Sensex jumped over 2,110 points (17.34%) to the day’s high of 14,284.21 points from the previous day’s close of 12,173.42. On Friday, it rose by 6.33% to the day’s high of 38,378.02 from the previous day’s close of 36,093.47, ending the day’s trade 38,014.62, 5.32% higher.

The Nifty 50 too jumped 6.33%—over 677 points—to touch day’s high of 11,381.9 and closed the day higher by 5.32%—up over 569 points—at 11,274.2.

The increase in the S&P BSE MidCap was higher than the Sensex, both in terms of day’s high as well as at close. While the index touched the day’s high of 14,154.33—an increase of over 868 points (+6.54%) compared to previous day close of 13,285.34, it closed over 834 points (+6.28%) higher at 14,120.07. In contrast, the S&P BSE SmallCap, at day’s high of 13,222.89, registered a jump of over 519 points (+4.09%) compared to previous day close of 12,703.27. At close, the index registered a rise of over 500 points (+3.94%) at 13,204.25.

The total revenue foregone for the reduction in corporate tax rate and other relief measures is reckoned to be Rs 1.45 lakh crore. A release from the finance ministry says that, in order to promote growth and investment, a new provision has been inserted in the Income-tax Act, 1961, with effect from FY20 allowing domestic companies to pay income tax at 22% provided they do not avail any exemption/incentive. “The effective tax rate for these companies shall be 25.17% inclusive of surcharge & cess,” the release said. “Also, such companies shall not be required to pay minimum alternate tax (MAT)”.

The ministry’s announcement has put India Inc. in high spirits. Ajay Piramal, chairman of Piramal Group, says that the government has signalled that it is listening to the industry and is willing to embrace it as a partner for progress of the country. “We are certain that this big bang reform will kick-start the economy,” says Piramal. “Surplus funds available to companies will be invested in capex and talent,” he adds. In a climate of global slowdown, this reform, in Piramal’s view, will make India an attractive destination for foreign institutional investors and long-term investors. “The announcement has brought parity to India’s corporate tax rate compared to that of advanced markets thus making it very competitive,” Piramal adds.

According to Gopichand P. Hinduja, co-chairman of Hinduja Group, the reduction in corporate tax is an excellent step that was needed for India’s economic revival and also for the manufacturing sector. “It shows government is well seized of the economic challenges facing all of us,” says Hinduja. “I only wish more such steps, which the government is already contemplating, could be taken together in one go like tapping NRI investments, with this one so as to create deeper impact, instil more confidence in economy and among corporates,” Hinduja adds. “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.”

Gautam Hari Singhania, chairman and managing director, Raymond, who believes that corporate tax cut move on the back of fiscal stimulus announced earlier by the government is expected to revive investment sentiments and accelerate economic growth. Calling the corporate rate tax cuts as an extremely bold and positive step by the government, Singhania applauds: “This is a fitting response to a slowing economy and weakening consumption.” While he is of the view that tax cuts augurs well for the Indian economy on a long term and will promote investment and growth, the lower tax rate along with fair and even-handed tax administration will help Indian businesses become more competitive in the global space.

For companies that enjoy tax holidays, and does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. “However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period,” the release said. Further, if these companies exercise the option they shall be liable to pay tax at the rate of 22% and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of MAT has been reduced from existing 18.5% to 15%.

This article appeared in Fortune India Online and can be read here:

Posted by Siddharth Mehta, Founder & CIO