A Stimulus To Economy, Sentiments &

Investments
Date: 20th Sept 2019 For Sales and Channel Partners Only
The Finance Minister in a press conference announced a bold decision to cut the corporate tax rate
and created a special lower tax for new investments with immediate effect. In particular, the Finance
Minister announced:

 The government has provided a direct stimulus of INR 1.45 lakh crore via reduction in
corporate tax rate from 30% to 22% with effective tax rate lowered from 34.9% to 25.2%
(including surcharge).
 The government also announced a special 17% rate for new companies incorporated on or
after 1st Oct 2019 and starting new manufacturing facilities before March 2023.
 The minimum alternate tax rate has been reduced from 18.5% to 15%.
 The government has also removed the additional surcharge on capital gains for all classes of
investors.
 Listed companies which have announced a buyback prior to July 5 will not be subject to the
new buyback tax.

Benefits Of Above Steps:

 These tax cuts are likely to help in reviving sentiments and kick start economy which have
been under pressure for last few quarters. The reflexivity of falling share price on the real
economy has now reversed.
 Higher FDI by way of international companies setting up manufacturing plants in India given
the tax rate is now just 15% (probably amongst the lowest in ASEAN region).
 Earnings estimates have been revised upwards by around 8-10%. Market multiples will
improve as return ratios will improve (ROE). This is sustained rise in ROE and not one time
impact.
 Investment rate has been struggling due to low corporate savings and to the extent, this tax
cut is likely to boost corporate savings and might help in reviving investment / capex.
 For banking & NBFC sector, low tax rate can also help in releasing capital and thus, helping
credit growth.
 Essentially expenditure has moved from Government hands to corporate and we believe that
corporates are better when it comes to spending.

Fiscal Remains A Cause of Concern:

 Fiscal deficit is likely to be revised upwards. If one goes by Government estimate of revenue
loss of INR 1.45 lakh crore, the fiscal deficit for FY20 is now around 3.8% compared to 3.3%
earlier estimated.
 Bond yields – Higher fiscal deficit expectation has led to spike in bond yields.
However, given low inflation in India and dovish stance of global central bankers,
there is still scope for lowering interest rates in India.
 Rupee – In the immediate future Rupee might have depreciating bias due to concerns
on fiscal deficit but if FDI flows improve and FII buying happens the impact can be
managed.
A Stimulus To Economy, Sentiments &
Investments
Date: 20th Sept 2019 For Sales and Channel Partners Only

Indian Corporate Tax Rates Now Quite Competitive Vs. Peer Countries

Source: Bloomberg, Emkay Research

The measures announced today are likely to turn the investor sentiment to positive as the tax cut is
likely to help corporate profitability, increase business confidence and improve the capex outlook.

Slashing the corporate taxes, although hits the fiscal deficit space, it could attract FDI inflows (where
the focus is shifting from China) and kick start the private investment cycle. This, along with
accommodative monetary policy, can have a positive impact on growth. This stimulus is a strong pitch
for foreign investors to make in India. If coupled with more measures expected, may boost exports,
lead to Job creation, and high GDP growth in coming years.

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