News Analysis

India Inc makes the most of corporate tax cut in Dec quarter

Vivek Ananth, BL Research Bureau | Updated on March 01, 2020

Of 859 listed firms with a market cap of more than ₹500 crore, the number of companies with a tax rate of 25 per cent or less increased to 470 in the December 2019 quarter, from 301 in the March 2019 quarter   -  Surachet99

Most large firms across sectors have opted for new rate; those enjoying tax holidays, or having accumulated losses, have stuck to old regime

There has been a substantial increase in the number of companies with a tax rate lower than 25 per cent in the December 2019 quarter. This is largely due to the Centre’s decision to cut the corporate tax rate last September, in a bid to support India Inc through the ongoing slowdown.

Despite the rider that those opting for the lower corporate tax rate have to forego many key tax deductions, including carry-forward accumulated depreciation and business losses, many companies seem to have found the new regime beneficial.

A BusinessLine analysis of the quarterly results of 859 listed firms with a market capitalisation of more than ₹500 crore showed that the number of companies with a tax rate of 25 per cent or less rose to 470 in the December 2019 quarter, compared to 301 in the March 2019 quarter.

The average tax rate is calculated as the provision for tax (including deferred taxes) at the end of a quarter divided by profit before tax.

Sectors that gained

The FMCG sector, in particular, has greatly reaped the benefit of the new corporate tax rate regime. There were only five FMCG companies with a tax rate of 25 per cent or less in the March 2019 quarter; this number more than tripled to 16 in the December 2019 quarter.

In the auto and auto ancillary space, too, the number of companies with a tax rate 25 per cent or less has doubled to 23, with large OEMs such as Bajaj Auto, Eicher Motors and Hero Motocorp gaining from the cut. Interestingly, Maruti Suzuki still has an average tax rate above 25 per cent.

Banking is another segment that seems to have grabbed the opportunity. The number of banks with a tax rate below 25 per cent more than doubled to 13 in the December quarter from the March 2019 quarter. Many private banks, including ICICI Bank, Kotak Mahindra Bank, Axis Bank and Bandhan Bank, currently have a tax rate below 25 per cent.

Among financial services companies such as NBFCs, asset management companies and housing finance companies, those with a tax rate less than 25 per cent rose to 31 at the end of December 2019, against 23 at the end of March 2019.

Among pharma companies, the number increased to 27 from 19. With the benefit on weighted deduction of R&D expenses moving lower to 100 per cent from next fiscal year against 150 per cent now, more pharma companies could migrate to the new corporate tax structure next year.

Those that desisted

Some companies in the IT services and metals & mining sectors, among others, that already had tax rates of 25 per cent or less due to tax holidays and accumulated losses, respectively, may not have found the new rates attractive enough to shift immediately.

The number of IT services companies with a tax rate of 25 per cent or less at the end of December 2019 increased marginally to 24, from 23 at the end of March 2019.

Overall, many companies that have accumulated losses and MAT credit have not moved to the new corporate tax regime. On the other hand, those with high average taxes have managed to bring down their tax outgo by opting for the flat rate.

Published on March 01, 2020

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