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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.
Budget
2019
Banking reforms I
• Upfront recapitalisation of banks Breather for the auto sector
• Additional support to NHB • Higher depreciation for vehicles
• Ensuring transmission of rate cuts • To introduce new scrappage policy for vehicles
Banking reforms II • Lift of ban of purchase of new vehicle by GoI
• Bank consolidation – 10 PSBs merged
into 4
● 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 on them 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.
● 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 Alternate
Tax. Further, the option, once exercised, cannot be subsequently withdrawn. Exemptions and incentives include incentives under Special
Economic Zones and free tax zones.
1
Assessment
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%.
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.
1.2
20%
1.0
1.7 1.8 15%
0.8
1.4 1.4
0.6 1.3 1.2 10%
0.4
5%
0.2
- 0%
FY14 FY15 FY16 FY17 FY18 FY19
Tax paid Tax rate (%)
Note: Numbers for fiscal 2019 are estimated on interim financials. 1,000 companies include 80 sectors along with segments like oil and gas and
financial services. Effective tax rate includes provision for current tax year as well as deferred tax payments
Source: CRISIL Research
2
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.
24% 23%
10%
16%
Note: Numbers for fiscal 2019 are estimated on interim financials for 1,000 companies
Source: CRISIL Research
3
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.
Steel
High Oil & gas
IT Financial services
FMCG
Mining
Share in taxes paid
Pharma
Non-ferrous metals Auto components
Cars and utility vehicles
Two-wheelers Power equipment
Medium Construction
Power Media and entertainment
Chemicals
Cement
Paints
Commercial vehicles
Capital goods
Real estate
Logistics Fertilisers
Tyres
Distilleries & breweries
Low Cotton yarn
Paper
Gems & jewellery
Consumer electronics
Sugar
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.
4
Annexure
Total corporate tax collection in FY18: Rs 5.7 lakh crore
Tax paid by ~26,000 companies analysed by CRISIL ~60% of total tax
Number of companies Revenue bracket Share in tax paid Effective tax rate
5
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