While companies in the banking and financial sector, along with others that claim little or no exemption, are set to witness significant gains on account of reduction in the corporate tax rate from around 35 per cent now (including surcharge and cess) to 25.17 per cent, for a large number of companies including Reliance Industries, TCS, Infosys, Wipro, HCL Technologies and Mahindra & Mahindra among others it may only turn out to be an academic exercise as they either paid less than 25.17 per cent tax in FY19 or marginally higher tax than that.
Finance Minister Nirmala Sitharaman Friday announced a new corporate tax rate of 22 per cent without exemptions and said the effective tax rate including surcharge and cess would now stand at 25.17 per cent.
As per Kotak Securities data, while the tax paid by Bajaj Finance for the year ended March 2019 stood at 35.7 per cent of the profit before tax, that for HDFC Bank and Kotak Mahindra Bank stood at 34.5 per cent and 34.1 per cent. Tax rate for IndusInd Bank and Axis Bank stood at 33.7 per cent and 32.9 per cent respectively.
On the other hand, Reliance Industries and TCS, the two largest entities in India by profitability and market capitalisation, paid 25.76 per cent and 26.13 per cent, respectively, as taxes on their PBT for FY19. While Infosys paid 26.22 per cent as tax, Wipro and HCL Technologies paid around 23 per cent and 17.6 per cent, respectively, as tax for FY19.
Many automobile firms like Eicher Motors, Bajaj Auto, Hero MotoCorp that pay taxes between 32 and 34 per cent will benefit from the move as it will leave more money at their disposal. Maruti Suzuki, which paid 28.33 per cent as taxes in FY19, will also benefit from the move as the net tax payout will now stand at 25.17 per cent for FY20.
Assuming all 487 firms in the NSE 500 list move over to the new effective tax rate, it will have a 7 per cent positive impact of their annual standalone EPS (earning per share). “Assuming these tax benefits come into play for the full year ended March 2020, the earnings growth estimate for the Nifty 50 universe would be 12 per cent year-on-year as against earlier expectation of around 5 per cent,” said Amar Ambani, senior president, Yes Securities.
For the financial sector, it is tantamount to a large recapitalisation, strengthening growth capacity and loss-absorbing buffer, bankers said.
For most banks and non-NBFCs, the direct benefit of the massive tax cut would be 15 per cent on earnings, 2.5-5 per cent on book value and 30-80 basis points on capital position.
“Since it’s a big step towards rekindling the corporate capex cycle and revitalising sagging consumption, it would also be credit positive for banks and NBFCs; undermining prospects of a deep and elongated NPA cycle. In general, risk aversion in the economy could reduce as the multiplier and sentimental impact of the corporate tax cuts play out,” said Rajiv Mehta, lead analyst-institutional Equities, Yes Securities.
In its note, Kotak Securities said that while effective tax rate of Nifty companies on an aggregate basis was 26 per cent and will now come down to 25.17 per cent, there are only 20 Nifty companies which paid more than 30 per cent effective tax rate and accounted for 43 per cent of overall net profit in FY19. “Any company paying 33 per cent tax rate will see its earning go up by 12 per cent. Overall, we can see Nifty earnings going up by 5-6 per cent in FY20 as the effective tax rate was already lower at 26 per cent, Add the sentiment booster angle and the way this will be taken positively by FIIs and local investors, we can expect the Nifty to rally by 9-10 per cent from today’s low of 10,700,” said the Kotak Report.
While foreign portfolio investors (FPIs) have pulled out Rs 34,800 crore from Indian equities since July, experts say that with earnings set to rise for companies, FPIs may make a comeback.