Tax move to create investible surplus, substantially improve bank credit

Private sector investment and the demand for bank credit is set to improve substantially following the Centre's decision to slash corporate tax rates.

The move – with new effective rate of 25.17% after considering surcharges and cess – will lead to an estimated saving of Rs 44,000 crore for 3,446 listed companies and this, in turn, could be used to reduce prices and plough back into the economy.

A majority of the companies, particularly in the real estate, hotel and software sectors, are expected to shift to the new rates.

"It is a big boost to corporate incomes. Companies and investors will have investible surplus and this will provide an impetus to growth in the economy," said Anil Harish, a leading corporate lawyer. Credit growth is expected to rise once private capex cycle picks speed.

With profits of companies fattening, there could be a slash in prices. "The savings by corporate India is expected to translate into 2% to 3% of cut in the product prices across sectors," according to an analysis done by the economic wing of State Bank of India.

But the Rs 1.45 lakh crore that the government will forgo on revenue due to the tax rate cut may lead to fiscal slippage, several economists said.

Weak consumption has been a major drag on growth and this could see some uptick in the second half of the financial year.

"Automobiles, banks, consumer staples and global commodity sectors are going to see large earnings upgrades. India will become more competitive versus other emerging markets," Kotak Institutional securities said in a report.

With this reduction, India is now among the lowest level of corporate tax among developing and emerging economies. Brazil, South Africa and China now have more corporate tax rate than India. In India, there is scope for the States (housing the SEZs) to further take steps to grant exemptions and incentives to companies willing to establish their shop floors in India.

"Greater transmission of interest rate cuts, accommodative monetary policy, and a normal monsoon are likely to support demand. Overall, we expect the second half of this fiscal to look better with GDP growth likely to be between 6.5%-7% in H2 2019-20, said Abheek Barua, chief economist at HDFC Bank.

Tax savings may be redirected in varied ways. A portion of it may be passed on to the customers by way of lower pricing while another part may reach investors in form of higher dividend payout, which could also increase the purchasing power of the small investors and stimulate demand, said SBI, which controls one quarter of the bank credit in the country.

However, there could be a stress on the fiscal deficit due to a revenue shortfall on account of the lowering of the corporate tax, shortfall in GST collections and an adverse global trade environment. Some experts estimate the fiscal deficit to rise to 4% of GDP versus a budgeted estimate of 3.3%. The government is betting on investments picking up, growth rising and revenue collections seeing an upside.

The government is also hoping that multinational companies will be encouraged to shift their manufacturing units to India after it has said that new factories would attract tax rates of only 15%, down from 25%. The bitter trade war between the US and China could provide India an opening to become part of the global chain of the MNCs, an industry executive said.

The prevailing effective tax rates were 29.12% for companies with a turnover of up to Rs 500 crore and the bigger companies were taxed at 34.94%, inclusive of cess and surcharge. Those companies who do not avail of any other government benefit or scheme will come under the new tax rate.