But what are the changes and what is their implications on listed companies? And how much will it hit the government's tax coffers?

First, let's understand the changes made by the government.

  1. The basic corporate rate tax has been slashed to 22% from 30% for domestic companies that don't avail any exemption/incentive.
  2. The effective tax rate for these companies shall be 25.17% inclusive of surcharge and cess. Also, such companies shall not be required to pay Minimum Alternate Tax or MAT.
  3. To boost manufacturing and the 'Make-in-India' initiative, the government has slashed corporate tax rate to 15%, from 25%, for domestic companies incorporated on or after 1st October 2019 making fresh investment in manufacturing.
  4. The option to pay income tax at the rate of 15% is available to companies which do not avail any exemption/incentive and commence their production on or before 31st March, 2023.
  5. The effective tax rate for these companies shall be 17.01% inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax.
  6. To provide relief to companies which continue to avail exemptions/incentives, the government has reduced the rate of Minimum Alternate Tax or MAT to 15%, from 18.5%.
  7. To increase the flow of funds into capital markets, enhanced surcharge will not apply to capital gains arising on equity sale or equity-oriented funds liable to securities transaction tax.
  8. Higher surcharge will also not apply on capital gains on sale of security including derivatives held by FPIs.

Now, lets understand the implications on companies in the listed space.

There could be meaningful EPS upgrades, as the tax savings will help companies improve their bottomline. Most impacted will be banking and consumer stocks as they operate at the higher end of the tax bracket!

Consumer Stocks

Consumer stocks Colgate could see a bump-up in earnings per share (EPS) to the tune of 15% due to lower tax. Other names like Nestle, HUL, Britannia, Asian Paints, Page, DMart, Havells, Crompton too could see meaningful upside.

For (Minimum Alternate Tax) MAT paying companies like Dabur, GCPL and Emami, EPS upgrades could be smaller.

Experience in the past suggests that companies retain these benefits with them, and do not pass them on to the consumer. It could show up in increased ad promotions, and an increase in the bottomline of companies.

Banking Stocks

Banks like HDFC, Kotak Mahindra and SBI operate in tax brackets upwards of 30%. With slashing of tax rates, there could be a 100-200bp improvement in RoEs and an increase in earnings to the tune of 10-12%.

Auto Stocks

Most auto OEMs and ancillary companies also pay close to 30-35% effective tax rate. It will certainly be a breather for auto companies which have been reeling under demand slowdown and lower profitability!

IT Companies

IT companies, pay lower than 25% tax rates in India anyway and thus these tax cuts should not lower their overall tax rates.

And last but not least, what is the hit to the government?

On the fiscal front, the total hit is estimated to be Rs. 1.45 lac crore ($20 billion). However, the hit may not be this big as the government expects improved economic activity to lead to higher tax collection!

What's your take on this writeup? Please Share your thoughts in the comments.

Disclaimer: The above report is compiled from information available on public platforms. inChat team advises users to check with certified experts before taking any investment decisions.

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