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Top 1,000 listed cos get a ~Rs 37,000 crore bounty
Over the past few days, a slew of measures have been introduced to address the slowdown in the Indian economy. Friday’s announcement, however, is the most material. We take a look at the implications in this note.
Major government actions from June 2019
Finance ministry’s announcements on September 20, 2019
- Changes in Income Tax Act provisions with effect from the current fiscal, which affords domestic companies the option to pay corporation tax at the rate of 22% subject to conditions*. The effective tax rate would be 25.17%, inclusive of surcharge and cess.
- Domestic companies incorporated on or after October 1, 2019, and making fresh investments in manufacturing, have the option to pay income tax at the rate of 15%. This benefit is available to companies that would commence production on or before March 31, 2023, while meeting some conditions*. The effective tax rate then shall be 17.01% inclusive of surcharge and cess.
- No tax shall apply on capital gains arising from sale of equity share in a company or a unit of an equity -oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, HUF, AOP, BOI and AJP, or on sale of any security including derivatives, in the hands of foreign portfolio investors (FPIs). Further, listed companies with buyback offers announced since July 2019 will also be exempt from tax on buyback.
- CSR activity to also cover specific start-ups.
- Reduce GST rates for hotels rooms from 28% to 18% for premium category (room rate more than Rs 7,500) and from 18% to 12% (room rate between Rs 1,001 and Rs 7,499) for other category. In addition, tax on outdoor catering has been reduced to 5 per cent from existing 18 per cent.
*Conditions include that companies will not avail of any exemption/incentives. Also, such companies shall not be required to pay Minimum AlternateTax. Further, the option, once exercised, cannot be subsequently withdrawn. Exemptions and incentives include incentives under SpecialEconomic Zones and free tax zones.
The government has announced revenue forego of Rs 1.45 lakh crore on account of these steps, a large proportion of which would be due to the corporate tax rate revision. The drop in tax rate would now bring India on a par with most Asian economies.
An analysis using CRISIL’s Quantix tool throws up a very interesting picture. Over 25,000 companies made profits in fiscal 2018, and they accounted for nearly 60% of the tax paid by India Inc. Companies (1,074 of them) with revenue of Rs 1,000 crore or more had the highest effective tax rate of 27%, and they accounted for nearly 40% of the total corporate tax revenues, and nearly 80% of tax collected. Companies (1,363) with revenues of Rs 400-1,000 crore had an effective tax rate of 24%, while companies (nearly 24,000) with less than Rs 400 crore revenues had an effective tax rate of 25.4%.
CRISIL Quantix reveals the corporate tax matrix
Companies in the highest bracket account for a larger proportion of taxes and would also benefit more given the higher tax rates. We have therefore done deeper analysis on larger companies with more recent data in the listed space.
CRISIL Research’s analysis of nearly 1,000 companies – spread across 80+ sectors such that they cover more than 70% of NSE’s market capitalisation – indicates that effective tax rates had risen over the past 5 years. These companies, including oil & gas, and financial services, account for nearly a third of the tax paid by India Inc.
Trend in effective tax rate for 1,000 listed companies
Of these 1,000 companies, nearly 250 made losses in fiscal 2019 thus did not pay taxes. Nearly 40% of them had an effective tax rate of more than 30%.
Further, nearly 55% of the tax paid comes from sectors such as oil & gas, consumer-related, and exports-linked (including IT services, pharmaceuticals, and gems & jewellery). On the other hand, construction-linked and investment-linked sectors account for 10% of the taxes each.
Spread of taxes and anticipated savings for key verticals
Our analysis indicates these 1,000 companies could see tax savings of Rs 37,000 crore, or nearly a fourth of the total savings anticipated by the government.
A caveat is in order: these estimates are based on profit before tax for fiscal 2019. Given that we expect 5-6% growth in India Inc revenues and EBIDTA for this fiscal, the savings could end up a tad higher.
Segments linked to the consumer would benefit the most given higher effective tax rates of over 30%. Exports-linked sectors such as IT and pharma, on the other hand, would benefit the least, accounting for only 5-6% of potential savings. That’s because they already enjoy low effective tax rates.
Our interactions with players in the consumption space also indicate an intent to pass on benefits from these in the form of discounts and tactical price shifts to gain market share.
Tax benefits would also vary within sub-segments. For instance, with the consumption space – assessment of automobile manufacturers that account for 50% of volumes sold indicates that tax cuts may have limited benefits because of already lower effective tax rates. But auto component manufacturers, which bear higher effective tax rates, may see maximum gains, an analysis of 70 firms that account for 20% of the market, showed.
Where top 30 sectors are in the tax savings grid
As for capex, it will be a function of how much these actions revive demand. New sectors such as electric vehicles and their batteries, cellphone manufacturing, and consumer electronics may gain traction under the ‘Make in India’ programme because of the tax benefits announced on new investments.