Corporate tax cut: Here's how banks and NBFCs will be impacted

Battling a six-year low economic growth and a 45-year high unemployment rate, the government on Friday slashed corporate tax rates for companies by almost 10 percent to 25.17 percent to bring them at par with Asian rivals such as China and South Korea, as it looked to boost demand and investments.

Two-and-half-months after presenting her maiden Budget, that was hailed as "development-friendly" and "future-oriented", union finance minister Nirmala Sitharaman announced fiscal measures that will cost the government Rs 1.45 lakh crore in revenue annually and may potentially derail the country's fiscal deficit roadmap.

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This will be effective on the condition that these companies will not avail any other incentive or concession such as tax holiday enjoyed by units in Special Economic Zones (SEZ) and accelerated depreciation.

The effective tax rate for existing units, after considering surcharges and cess such as Swachh Bharat cess and education cess - which are levied on top of the income and corporate tax rates, will be 25.17 percent as compared to 34.94 percent now. For new units, it will be 17.01 percent as opposed to 29.12 percent now.

CNBC-TV18’s Abhishek Kothari tells us how banks and non-banking financial companies (NBFCs) will benefit from the tax cut announced by the Narendra Modi government.

Private banks in the country pay the highest tax between 34- 35 percent on an average. If you look Yes Bank and Federal Bank, they are paying around 35 percent, HDFC Bank is paying around 34.75 percent, Kotak Mahindra Bank 34.7 percent and ICICI Bank is the paying around 31.7 percent, the lowest amongst these top private banks. Therefore, the reduction in tax rate is most beneficiary to private banks in the banking, financial services & insurance (BFSI) sector.

Coming down to NBFCs, it is a mixed bag, not all of them are paying a high tax rate. HDFC Ltd pays less than 20 percent as tax. Amongst NBFCs, the ones that will benefit immensely from the reduction in tax rate is Bajaj Finance, Shriram Transport, Cholamandalam Investment and Finance Company, M&M Finance and CanFin Homes Ltd. NBFCs like L&T Finance, LIC HF, Indiabulls Housing, Power Finance Corporation and REC Limited pay taxes above 25 percent.