Posting its BIGGEST SINGLE DAY GAIN in a decade, both, the SENSEX and NIFTY gained 5.32% each on Friday. Backed by the 4th stimulus package introduced by the FM, both the indexes made investors richer by a whooping Rs. 7 Lakh Crore. All in one day.
The highlight of the Package?
Lowering the Corporate Tax Rate to 25 % (With an Effective Tax rate of 25.17 % including surcharge and cess). Previously, India had one of the highest Corporate Tax Rates in the world, with some companies paying an Effective Tax Rate of 44.9 %.
This reduction was the spark that light the rally all of us witnessed today.
In addition to this, domestic companies which do not avail any other exemption, can opt to pay Corporate Tax at 22 %, whereas, new Manufacturing Companies being set up after 1st October, 2019, will be taxed at 15 % (Effective Tax Rate being 17.9 % including surcharge and cess). These companies will not have to pay the Minimum Alternative Tax either.
This move is aimed at the companies which are looking to exit China as their manufacturing hub as Rising operating costs and the US – China Trade War take its toll on the industry.
The Share Buy Back Tax, introduced by the FM in her Maiden Budget this year, was also rolled back today.
Stimulus Package 4.0 will ensure better profitability for the companies due to lower Corporate Tax Rates accompanied by surging Corporate Savings and Earning Per Share. 4.0 will not benefit the consumer directly in the short run, but will flow through companies in the form of reduced prices, boosting demand and furthermore, consumption expenditure.
As for the companies comprising the NIFTY50, the Effective Corporate Tax Rate was 26 % as opposed to 25.17 % now. But, 20 companies in the Index paid an Effective Tax at over 30 %. These same companies contributed to 43 % of the overall profit of all the companies comprising the Index.
The reduced Tax Rates will ensure better earnings for the companies in the future. Although, all companies will not benefit much from this reduction, the companies which see a profit in the next 5-7 years stand to gain the most.
The package also brought about various intangible benefits with Sentiment being the most important. Package 4.0 boosted investor confidence and sentiment which will also add to the Earnings of the companies.
Is there a downside to this as well?
Lower Tax Rates mean Lower Revenues for the Government. 4.0 will cost the Government an astounding Rs. 1.45 Lakh Crore. Analysts fear this will widen the fiscal deficit to 4%, but other factors might not let it touch ceiling levels. The recent dividend payout of Rs. 1.76 Lakh Crore handed by the RBI seemed sufficient to cover this loss of revenue had package 3.0 not eaten away Rs. 70,000 Crore from this figure.
The announcements made by the FM came a day after the RBI governor had stated that there was room for more rate cuts which was needed to boost the Economy. A few more stimulus packages are expected in the near future to help the Government realise its dream of becoming a 5 Trillion Economy. Will these packages be enough to spur growth, or is there a need for more, is yet to be seen.
The Financial Forum 