The S&P BSE Sensex jumped 2,284.55 points on Friday in intra-day trade led by a slew of measures finance minister Nirmala Sitharaman announced on Friday morning to boost growth and investment, the highlight of which is a steep cut in corporate tax. This is the highest intra-day gain the index has seen in a decade.

The last time the 30-stock benchmark index saw a similar gain was on May 18, 2009, when the United Progressive Alliance returned to power. The Sensex jumped over 2,110 points (17.34%) to the day’s high of 14,284.21 points from the previous day’s close of 12,173.42. On Friday, it rose by 6.33% to the day’s high of 38,378.02 from the previous day’s close of 36,093.47, ending the day’s trade 38,014.62, 5.32% higher.

The Nifty 50 too jumped 6.33%—over 677 points—to touch day’s high of 11,381.9 and closed the day higher by 5.32%—up over 569 points—at 11,274.2.

The increase in the S&P BSE MidCap was higher than the Sensex, both in terms of day’s high as well as at close. While the index touched the day’s high of 14,154.33—an increase of over 868 points (+6.54%) compared to previous day close of 13,285.34, it closed over 834 points (+6.28%) higher at 14,120.07. In contrast, the S&P BSE SmallCap, at day’s high of 13,222.89, registered a jump of over 519 points (+4.09%) compared to previous day close of 12,703.27. At close, the index registered a rise of over 500 points (+3.94%) at 13,204.25.

The total revenue foregone for the reduction in corporate tax rate and other relief measures is reckoned to be Rs 1.45 lakh crore. A release from the finance ministry says that, in order to promote growth and investment, a new provision has been inserted in the Income-tax Act, 1961, with effect from FY20 allowing domestic companies to pay income tax at 22% provided they do not avail any exemption/incentive. “The effective tax rate for these companies shall be 25.17% inclusive of surcharge & cess,” the release said. “Also, such companies shall not be required to pay minimum alternate tax (MAT)”.

The ministry’s announcement has put India Inc. in high spirits. Ajay Piramal, chairman of Piramal Group, says that the government has signalled that it is listening to the industry and is willing to embrace it as a partner for progress of the country. “We are certain that this big bang reform will kick-start the economy,” says Piramal. “Surplus funds available to companies will be invested in capex and talent,” he adds. In a climate of global slowdown, this reform, in Piramal’s view, will make India an attractive destination for foreign institutional investors and long-term investors. “The announcement has brought parity to India’s corporate tax rate compared to that of advanced markets thus making it very competitive,” Piramal adds.

According to Gopichand P. Hinduja, co-chairman of Hinduja Group, the reduction in corporate tax is an excellent step that was needed for India’s economic revival and also for the manufacturing sector. “It shows government is well seized of the economic challenges facing all of us,” says Hinduja. “I only wish more such steps, which the government is already contemplating, could be taken together in one go like tapping NRI investments, with this one so as to create deeper impact, instil more confidence in economy and among corporates,” Hinduja adds. “This would certainly help put businesses back on track, generate more employment and most importantly, keep India as the principal investment destination amidst global slowdown.”

Gautam Hari Singhania, chairman and managing director, Raymond, who believes that corporate tax cut move on the back of fiscal stimulus announced earlier by the government is expected to revive investment sentiments and accelerate economic growth. Calling the corporate rate tax cuts as an extremely bold and positive step by the government, Singhania applauds: “This is a fitting response to a slowing economy and weakening consumption.” While he is of the view that tax cuts augurs well for the Indian economy on a long term and will promote investment and growth, the lower tax rate along with fair and even-handed tax administration will help Indian businesses become more competitive in the global space.

For companies that enjoy tax holidays, and does not opt for the concessional tax regime and avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. “However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period,” the release said. Further, if these companies exercise the option they shall be liable to pay tax at the rate of 22% and option once exercised cannot be subsequently withdrawn. Further, in order to provide relief to companies which continue to avail exemptions/incentives, the rate of MAT has been reduced from existing 18.5% to 15%.

According to Aakash Uppal, partner, tax and regulatory services, BDO India, based on the data published by the Income Tax Department for tax returns for assessment year 2017-18, corporates formed about 1.5% of total taxpayers, however they contributed over 55% of income taxes. “This sure is a bold move by the government, considering the fact that there has been a dip in GST collections,” says Uppal. “However, this could be a good move to break the Catch-22 situation; improvement in business is likely to fillip tax collections,” Uppal adds.

The reduction of corporate tax rates is currently restricted only to corporate entities only. “A similar relief to partnerships and limited liability partnerships (LLPs), which constitute a large number of tax payers would surely make way for an inclusive tax reform,” says Bhavin Shah, associate partner, tax and regulatory services, BDO India.

Sitharaman’s latest measures also encompassed various types of equity market investors. The finance ministry release highlighted that in order to stabilise the flow of funds into the capital market, the enhanced surcharge introduced by the Finance (No.2) Act, 2019, will not apply on capital gains arising from the sale of equity share in a company or a unit of an equity oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, Hindu undivided family (HUF), association of persons (AOP), body of individuals (BOI), and artificial judicial person (AJP). Also, the enhanced surcharge will also not apply to capital gains arising on sale of any security including derivatives, in the hands of foreign portfolio investors (FPIs).

Further, investors would indirectly stand to gain from the government’s move to provide relief to listed companies which have already made a public announcement of buy-back before July 5, 2019, (the Union Budget day). “It is provided that tax on buyback of shares in case of such companies shall not be charged,” the release said.

A lot of this was expected on July 5, but the budget speech was lacklustre. While the Sensex had shed over 390 points at the close of July 5, on the following trading day (July 8) the Sensex closed 793 points lower—over 1,187 points over two trading days after the Budget. The fall was over 907 points in a single day if July 8’s low of 38,605.48 points was compared to July 5 closing of 39,513.39 points. And, in value terms, from ₹70.8 lakh crore on July 4, S&P BSE Sensex’s index market capitalisation saw a decline of 9.05% to ₹64.4 lakh crore on September 19.

The record gain on September 20 has helped the recovery of ₹3.24 lakh crore in market value in a single day. At ₹67.7 lakh crore, the index’s market capitalisation is still 4.48% lower compared to July 4, the eve of the Union Budget.

However, markets and market observers have been cheering the government’s latest move. Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services says: “We do believe that we need fiscal stimulus to get out of this slowdown and monetary policy alone could not do that. Hence this move is very good for the country and markets.” Oswal is of the view that the tax rate reduction is positive for all companies to the tune of 3% to 10%

Mumbai-based Jimeet Modi, founder and CEO of SAMCO Securities, calls the move yet another surgical strike on bears and negative sentiments in the economy which will create an environment of surplus in the hands of corporates for making further investments and ease their liquidity concerns. According to Modi, companies in consumer finance, banks, hotels pay upwards of 32% tax which will have maximum benefits of the rate cut, while rest of the sectors will have nominal positive impact. “This is a path-breaking move delivered by Modi 2.0 government in the interest of the economy at the cost of government exchequer in times of crises which will go down well in the history,” says Modi.

According to Devang Mehta, head of equity advisory at Mumbai-based Centrum Wealth Management, apart from the benchmark indices correcting, it was more to do with the sentiment which was hitting new lows day after day. “That seems to be dealt with by daring to cut corporate tax, which clearly has a positive impact on the earnings,” says Mehta, who believes that markets are a slave to earnings. “Hopefully, with positive trigger for higher earnings & change in prevailing pessimistic mood, it is imperative for investors to keep the faith and keep investing in companies with sound fundamentals and robust earnings growth, rather than getting carried away and buying duds,” Mehta advises.

On lower tax rates’ positive impact on corporate earnings, Rusmik Oza, head of fundamental research at Kotak Securities, highlights that the effective tax rate of Nifty50 companies on an aggregate basis was 26% which will now come down to 25.17%. “There are only 20 Nifty companies which paid more than 30% effective tax rate and accounted for 43% of overall net profit in FY19,” says Oza. “Any company paying 33% tax rate will see its earning go up by 12%,” he adds.

Overall, Oza foresees Nifty earnings going up by nearly 5%-6% in FY20 as the effective tax rate was already lower at 26%. “Add the sentiment booster angle and the way this will be taken positively by FIIs and local investors we can expect the Nifty to rally by 9-10% from today’s low of nearly 10,700,” Oza adds.

According to Siddharth Mehta, founder and CIO of Bay Capital Partners, the tax cuts announced are likely to create an additional surplus in the hands of corporates which in turn will allow for additional liquidity of nearly $20 billion in the short term. “While this will lift corporate confidence and allow for greater investment and job creation, this is a forward looking and progressive reform by the government to ensure India is a fiscally attractive jurisdiction and shows a willingness of the government to forego near-term revenues to build a longer-term competitive global investment destination to attract foreign capital,” says Mehta.

According to Madhavi Arora, economist, forex and rates, at Edelweiss the effective corporate tax reductions is indeed a big supply side reform and should help spur investment cycle, which has been perpetually crippled. “However, the supply side tax reforms generally have relatively longer term economic returns, albeit impact the revenue side in the near term,”Arora warns. Besides, the current slowdown cycle, in Arora’s opinion, is different from the 2012-13 slowdown as the consumption demand is also significantly constrained in this cycle (unlike the last one) and thus could limit fresh investment demand in the near term. “Therefore a broader tax cut covering all economic agents would have probably yielded better economic returns,”Arora opines.

Arora’s argument finds resonance in an International Monetary Fund (IMF) working paper titled “U.S. Investment since the Tax Cuts and Jobs Act of 2017”. The paper’s authors—Emanuel Kopp, Daniel Leigh, Susanna Mursula, and Suchanan Tambunlertchai—conclude that there is no consensus on how strongly the Tax Cuts and Jobs Act (TCJA) has stimulated U.S. private fixed investment. “Some argue that the business tax provisions spurred investment by cutting the cost of capital. Others see the TCJA primarily as a windfall for shareholders,” the paper summary reads. Model simulations and firm-level data suggest that much of the weaker response reflects a lower sensitivity of investment to tax policy changes in the current environment of greater corporate market power, the paper further noted.

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