Corporate Tax Cut Announcement BY FM Nirmala Sitharaman: Impact on Economy and Stock Markets

The Government announcement on 20th september to cut the Corporate tax came as big bonanza for the stock market. As soon as the announcement came sensex and nifty soared to new highs in a single day which was in a way historic.  

In Prime minister words “Corporate Tax cut will give stimulus to Make In India initiative and attract private investment from across globe and make india business competitive in terms of tax policies”.

Key Points of the announcement 

  1. Corporate Tax is reduced to 22% from 25%. Effective tax rate including surcharge and cess is reduced to 25% from 35% – This is subject to the condition that companies cannot avail any exemption or incentive. Also companies are not required to pay Minimum Alternate Tax.
  2. New Domestic Manufacturing Company incorporated  on or after October 1, 2019 will pay 15% tax(Effective Tax 17%) – Again no incentive and benefits should be availed by the company and no MAT imposed. The company should start functioning on or before March 31, 2023.
  3. MAT reduced to 15% from 18% for companies which avail the exemption or incentive.
  4. There will be no tax on the share buy backs if the companies have announced the buy backs before 5th july 2019.
  5. Relief for FPI (Foreign Portfolio Investment) to exempt super rich tax on capital gain from sale of equity shares and sale of derivative.

Most Benefited sectors

  1. Banking Sector: Banking sector will show increase in their PAT(Profit After Tax). It will then lead to increase in ABV(Adjusted Book Value).
  2. FMCG: This sector will witness increase in earnings due to corporate tax cut. If they pass on the benefit to the consumers then it will boost the consumption and volume growth.
  3. Capital Goods: The companies belonging to this sector will also benefit a lot from corporate tax rate cut as they had the effective tax rate of 30-35%. Mid cap companies will benefit significantly
  4. Commercial Manufacturing Vehicle: It will help gain in private Capex investment.

 Least Benefited Sector

Pharma And IT will not be impacted much as their current effective tax is comparable to new tax rate due to tax free zone benefit, SEZ benefit and R&D benefits.