Benefit Of Corporate Tax Rate Cut For India Inc To Boost Incremental Investments: ICRA
Few sectors to benefit more and may pass on benefits to end-users while others may have a limited benefit
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ICRA Ratings has said that the recent corporate rate cut announcement by the Government, with the intention of pump-priming economic growth, attract more investments and ultimately spur consumption augurs well for the industry. The saving impact of the rate cut will, however, vary from sector to sector, which will determine the benefit to the end consumer by way of price reduction. The corporate tax rate for domestic companies have been reduced to 22 per cent, provided no exemptions or incentives are availed, bringing the effective tax rate to 25.17 per cent including all surcharges and cesses. Additionally, to promote fresh investments, new domestic companies (incorporated from October 1, 2019, and commencing production before March 31, 2023), making fresh investment in manufacturing will have an option to be taxed at 15 per cent (effective tax rate of 17.01 per cent).
Commenting on the impact, Mr Shamsher Dewan, Vice President, Corporate Ratings, ICRA said, “The GoI’s move is aimed at providing a substantial and broad-based boost to business sentiment in the immediate term and is expected to moderately impact consumption demand, especially for big-ticket items. The tax cut would also boost long term prospects spurring incremental investments in capacity expansion as well.”
This is the first material tax cut for corporate India in several years. Hitherto, the effective rate of India Inc had been increasing over the past decade and exceeded the global norm. This had not only undermined the country’s competitive status in the export market but also had an adverse bearing on incremental capital investments and FDI.
According to ICRA, tax contribution has been skewed towards a few key sectors and high effective tax rates have resulted in certain sectors contributing significantly to overall taxes. Three sectors - oil and gas, metals and mining and IT together account for close to 50 per cent of the total tax contribution of corporate India. Of these, oil & gas and metals & mining have disproportionately high effective tax rates vis-à-vis other sectors. On the other hand, although sectors like power and telecom contribute significantly to overall revenues (8 per cent in FY2019), their contribution to taxes paid was negligible in FY2019 on account of weak performance or accumulated losses.
Adds Dewan, “An analysis of ICRA’s sample of 420 companies indicate that automobile ancillaries, FMCG, consumer durables, building materials and oil & gas are likely to be major beneficiaries, given that these sectors are currently taxed at much higher effective rates than the proposed 25.17 per cent. Out of these, consumer-oriented sectors may potentially pass on part of the savings in the form of discounts or price reductions to revive demand, especially in the current context of subdued consumer demand. The extent of benefit would, however, be limited for sectors like IT, Pharmaceuticals, Power etc. which already enjoy low tax rates due to existing exemptions and tax benefits availed in certain sectors, or accumulated losses.”
Scope for localization and price reductions in select sectors
Can potentially pass on the benefit of lower tax rates to customers in the form of price revisions or discounts in order to revive demand given the sharp slowdown
The revision augurs well; sector will see a direct sharp reduction in tax outgo. However, the benefits could be largely passed on to OEMs. The 15 per cent tax rate announced for new entities increases the viability of localisation of components, and new JVs, especially in the space of electric vehicles and their components are likely to be set-up
Would be a major beneficiary. Materials including paint, plywood, ceramic tiles etc. are expected to undergo a downward price revision. This would also reduce the benefit of organised players and reduce the gap in pricing with unorganised players
The range of tax-saving gains varies across different companies. This opportunity can be used by the companies to increase promotional activity and gain market share
One of the major beneficiaries. Organised players expected to gain market share vis-à-vis unorganised players with scope for savings being passed on to customers by way of increased promotional activities
Oil and Gas
The tax cut will improve net profits of companies as most were paying tax close to peak rates. However, few companies who have investment-linked exemptions will not benefit much as existing rates are lower than 25.17 per cent. These may continue with existing tax structures until tax breaks are exhausted
Given that the domestic tax rates applicable to IT companies are already low because most of them operate in SEZs, which offer tax benefits over a prolonged period. As such, the benefit would be minimal
The impact is not expected to be material as the sector already enjoys a host of tax exemptions such as income tax exemptions for EOUs or entities operating in SEZs and; GST linked benefits from operating in tax-free zones. However, specific companies enjoying lower rates due to MAT applicability will benefit as MAT rates have been reduced to 15 per cent from 18.5 per cent
Power generation and Discoms
Given the accumulated losses in the sector at present, the immediate benefit would be minimum in the near term