Tax sop announcement by Finance Ministry

Event Note

Independent Equity Research

September - 2019

Equentis Wealth Advisory Services (P) Ltd

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After many mini announcements, government went into overdrive
with bold cut in corporate tax rate-
VERY POSITVE; WE BELIEVE THIS IS NOT THE END AND SOME MORE
MEASURES MAY FOLLOW
Tax reduction initiatives (15% accretion to earnings for full tax paying company)

a. Any domestic company will have option to pay income tax at 22% if they don't avail any exemptions/incentives.
b. Surcharge reduced from 12% to 10%; so effective tax for these companies rate is 25.17% inclusive of cess and vs
34.94% now
c. MAT down from 18.5% to 15%
d. To attract fresh investments and boost Make-In-India, any new domestic mfg company incorporated after Oct 1,
2019 has option to pay 15%. Effective tax rate will be 17.01%.
e. Companies enjoying tax holidays will have an option to avail the new corporate income tax rates after the expiry
of tax holiday
f. Once new tax rate is availed, no changes can be made

Old rate incl.

New base New rate incl.
Type of tax Old base rate surcharge and
rate surcharge and cess
cess

Corporate tax 22% 25.17% 30% 34.94%

New manufacturing co- incorporated

after 1st Oct’19 and manufacturing 15% 17.01% 25% 29.12%
before FY23

MAT 15% na 18.5% na

Removal of Surcharge

g. In order to stabilise flow of funds in capital markets, increased surcharge in this year's budget shall not apply on
capital gains made through sale of equity share in companies liable for STT in the hands of individual, AOP.
h. Enhanced surcharge to not apply to capital gains arising on sale of any security including derivatives in the hands
of FPIs.

Buyback tax clarity

i. In order to provide relief to listed companies which have already made a public announcement to buy back shares
before July 5, 2019, it is provided that tax on buyback of shares in case of such companies, shall not be charged

CSR spend scope widened

j. 2% CSR spend by companies can now also be directed towards science and technology R&D.

Impact on revenue

k. Revenue foregone for the reduction in corporate tax rate is Rs 1.45 lakh cr
l. Economic buoyancy brought about from the reduction of these rates will make up for the loss in revenue besides
expansion in tax basket as per govt.

OUR ASSESSMENT

• Based on listed companies’ profitability of FY19 (Rs4.8lakh cr), the immediate benefit of above should be 75000cr
while all companies (private +public) should be 1.45lakh cr.

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• Our assessment on worst impact on fiscal deficit (assuming minimum economic buoyancy) will be 70bps, moving up
to 4% vs 3.3% budgeted. However, if we consider additional RBI transfer of 86000cr (1.76lkh cr vs 90000cr
budgeted), the impact on FD may be limited. Anyways the current GDP/consumption trends suggested that we had to
let go off fiscal discipline for some quarters.
• Consensus Nifty EPS should go up by 9% (based on weightage avg tax rate) from Rs550/660 in FY20/21 to Rs600/720.
• Positives- Capex cycle boost as companies can reinvest tax savings, positive for FDI investments, positive for capital
market due to boost to earnings, rerating, abolishment of surcharge on capital gains tax
• Neutral- No relief in either personal tax cuts or removal of capital gains tax not done which were expectations.

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