Historical day: market moved more than 5%, recording highest single day gain in last 10 years

Historical day: market moved more than 5%, recording highest single day gain in last 10 years after FM’s tax booster package to economy.

The reduction in corporate tax rates seems a big sentiment booster for markets which is receiving an overall thumbs up that market gave to these historic moves, without doubt the biggest reform since 1991 including GST.

Highlights are as under:

FM announcements bullets points:

1. Corporate tax rate to be 22% without exemptions, inclusive of surcharge and cess.

Effective corporate tax rate after surcharge to be 25.17 percent.

2. MAT has been reduced to 15% from 18.5% for companies who continue to avail exemptions and incentives.

3. For listed companies which made announcement for public buyback before July 2019 it is provided that tax on buyback on shares of such companies will not be charged.

4. To attract investment in manufacturing, local companies incorporated after October 2019 will pay tax at rate 15%.

Understanding Economic activity impact:

1. Global companies will now be encouraged to set up manufacturing and services base in India.

2. Indian corporate tax structure now is at par and competitive with global economies.

3. It will revive the spirit of corporate India, will encourage investment and job creation over time.

Examining Impact:

Besides economic activity, we believe that reduction in tax rates will increase after Tax profitability of companies. Our calculus suggests corporate earnings will improve by 4-5% which may result in capex over due course of time.

Question still unanswered:

Consumption slowdown – Demand is a human perception and sentiment. Defiantly above talked economic activity will act as an aid to revive consumption, but we feel further steps are required to fasten the pace mainly about rural demand. Reduction in personal income tax rate may act as catalyst.

Fiscal Deficit – These tax revisions will impact Government with estimated Rs. 1.48 Lakh crores fiscal slippage, which may result in reduction in spending by GOI. We believe that RBI’s dividend of Rs. 1.78 lakh corers received by GOI may act as cushion for this problem.

Conclusion:

Anyways, steps taken by government was structural reform and may help economy to deal with existing slowdown in longer run.