2 in 3 cos may shift to new corporate tax regime immediately
16 October 2019
The reduction in corporate tax rate announced by the government "spawns optimism with a tinge of cautiousness among companies," says reatings agency Crisil, in a new report.
Optimism as most companies will benefit and intend to retain the savings to reduce funding constraints and strengthen balance sheets to be ready for fresh capex once demand revives. And cautiousness as the savings alone may not lead to immediate pick-up in fresh capex given the weak demand environment.
These finding are based on responses received in a survey of 850 large (by revenue) Crisil-rated companies. It encompasses both listed and unlisted companies spread across all sectors and is therefore a close representative of corporate India.
According to the changes to the Income Tax Act, 1961, domestic companies have the option to pay corporate tax at a reduced effective rate of 25.17 per cent. This is conditional upon them relinquishing other exemptions such as a set-off of Minimum Alternate Tax credits, and incentives under special economic and tax-free zones. And once exercised, the option is irreversible.
A third of the companies surveyed – from capex-heavy sectors such as power, and oil & gas – have expressed a desire to continue with the current tax regime. However, a majority of them from sectors such as auto, chemicals, textiles, gems & jewellery, and retail are likely to shift immediately.
Says Subodh Rai, senior director and head, analytics, Crisil Ratings, “Companies shifting to the new regime are likely to see close to 700 bps of tax savings. While this may not kick start the much-delayed private investments cycle, it could help ease funding constraints of companies to some extent. About half of the companies surveyed said they will use the savings for ongoing capex, reduce debt or retain cash, which would strengthen balance sheets and prime them for fresh capex once demand improves.”
Around 37 per cent of the companies surveyed are yet to decide on utilisation of tax savings though option to increase dividends found least preference. And just 10 per cent said they will pass on the benefit through higher discounts and sales promotion – indicating the tax cut alone may not seed demand growth.
Overall, the tax cut provides much-needed impetus to companies to press the capex button once demand stages a comeback. India Inc’s credit outlook remains contingent upon this pick-up in demand.