Economy

Only 10 per cent corporates to pass on benefits of lower tax to consumers: Study

Our Bureau Mumbai  | Updated on October 15, 2019 Published on October 15, 2019

The study, which was conducted by Crisil, says that capex-heavy sectors have expressed a desire to continue with the current tax regime.

If anyone was expecting India Inc to show 'animal spirits' following the recent cut in corporate tax, think again. A study by Crisil has revealed that only 10 per cent of the corporates are ready to pass on the benefits of lower taxes to consumers in the form of lower tariffs.

"Around 37 per cent of the companies surveyed are yet to decide on utilisation of tax savings, though the option to increase dividends found least preference. And just 10 per cent said they will pass on the benefit through higher discounts and sales promotion – indicating the tax cut alone may not seed demand growth," Crisil said.

The agency believes that the reduction in corporate tax rate announced by the government spawns optimism, with a tinge of cautiousness among companies.

These finding are based on responses received in a survey of 850 large (by revenue) Crisil-rated companies. It encompasses both listed and unlisted companies, spread across all sectors, and is therefore a close representative of corporate India.

As per the changes to the Income Tax Act, 1961, domestic companies have the option to pay corporate tax at a reduced effective rate of 25.17 per cent. This is conditional upon them relinquishing other exemptions such as a set-off of Minimum Alternate Tax credits, and incentives under special economic and tax-free zones. And once exercised, the option is irreversible.

"A third of the companies surveyed – from capex-heavy sectors such as power, and oil & gas – have expressed a desire to continue with the current tax regime. However, a majority from sectors such as auto, chemicals, textiles, gems & jewellery, and retail are likely to shift immediately, " CRISIL said.

Subodh Rai, Senior Director and Head, Analytics, CRISIL Ratings, said, “Companies shifting to the new regime are likely to see close to 700 bps of tax savings. While this may not kick-start the much-delayed private investments cycle, it could help ease funding constraints of companies to some extent. About half of the companies surveyed said they will use the savings for ongoing capex, reduce debt or retain cash, which would strengthen balance sheets and prime them for fresh capex once demand improves.” 

Published on October 15, 2019
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