Finance minister Nirmala Sitharaman said the government proposed to cut corporate tax rates to 22 percent for domestic companies provided they will not avail exemptions or incentives and 15 percent for new domestic manufacturing enterprises as part of a raft of measures to boost economic growth.
Companies not availing exemption will not be required to pay minimum alternative tax (MAT),"
Sitharaman told reporters in Goa.
This is not a single day cheer for the corporates and markets but marks a larger shift in the thinking of Government how to manage the economic slowdown.
With the substantial corporate tax rate cuts, the dynamics of profitability and business models may undergo a significant positive change.
Profit margin impact of this move is could be exponential for companies changing the business dynamics and break-even points of profits by at least two to three years.
Overall profitability and earnings per share (EPS) growth, which have been languishing, could have a positive impact of 10 percent to 20 percent growth factor and almost 15 percent to 25 percent for the mid and small cap companies. This could be a big multiplier for profits.
Nifty EPS growth may see a dramatic change from single digit growth in the last 3-5 years to a sustained 20 percent plus growth over the next one to three years. This could lead to a significant re-rating for the Indian equity markets.
With business models and profitability models changing, finally capital expenditure growth cycle may move to double digit growth. Gross capital formation, which has been fluctuating around five percent, may move significantly higher. This could spur corporates sitting on the fence to start the investment cycle.
Aligning tax rates towards global tax rate ranges also can lead Indian corporates competing on a global scale with comparable margins to effectively change the mind-set of Indian entrepreneurs.
Supply side constraints, fiscal reforms and finally, the last question remains, will be that of demand side stimulus. A multiplier wealth-effect could be a game changer driving the demand stimulus on both the corporate and individual level.
With the above factors the cash flow cycle will ease and will also push the demand side of the equation. More than a economic slowdown, the cash-flow slowdown was impacting the demand side which can see a quicker revival and demand coming back faster than expected for most of the sectors and also leading to job growth.
First Published: Sept 20, 2019 3:17 PM IST
