Tax cut impact


October 2019
Tax cut impact

In an effort to bring back the"animal spirit" to the stock market, the government on September 20, 2019 lowered corporate tax effectively by 10 percentage points for existing companies and 12 basis points for new companies. This is the fourth dose administered by the government to arrest the slowdown in the economy. Here are some of the observations as reported by the financial analysts.

Mining industry in India is still the highest taxed in the world despite the Government's decision to slash corporate tax rate. Rajib Lochan Mohanty, Vice President, Federation of Indian Mineral Industries (FIMI) said,"There was a need for rationalising the taxation structure in mining sector for sustainable development and deriving long-term benefits in terms of sustained raw material security for industries."

"The government needs to realise that the taxation regime for mining in India affects all downstream industries and employment opportunities in the economy, while fuelling the already skewed balance of payment through additional import of minerals," Mohanty said. Now, the effective tax rate in India works out to be 58 per cent for existing mines and 54 per cent for new mines granted through auction. These taxes include corporate tax, district mineral fund and national mineral exploration trust, he explained. All levies, payments to the government make domestic raw materials costly, resulting in costlier finished products in the economy and leading to import and reduced gross domestic product in mining, he said.

Mohanty further said many of the existing private non-captive working mines will expire in March next year and it is apprehended that such blocks may not resume operations in next two-three years even after their successful auction. This Federation earnestly requests that the tenure of the non-captive mining leases (merchant mines) be extended till March 31, 2030. There have been job losses of 12.8 lakh people - both direct and indirect - in mining sector in Goa and Karnataka due to ineffective regulatory mechanism and subsequent adverse decisions by Supreme Court.

Road construction to drop
The scenario for cement companies has not been good for quite some time now. The news of tax cut brought some cheers for the cement players. Economic Times Intelligence Group is of the view that the mid-and-small-cap companies, which are in the tax bracket of 31-42 per cent as of FY19, will have a saving to the tune of 6-17 per cent. The tax cut has been joyously welcomed by this cement sector and its investors who had a long waiting.

Generally as a rule of thumb, infrastructure consumes up to 20-25 per cent of cement, while real estate consumes around 65-75 per cent of cement. For the last three years, the government spending on infrastructure projects has been growing at a little over 20 per cent year on year comparison, but now it is going to fall below 20 percent for the year 2020.

According to a CARE Ratings estimate, the pace of road construction is expected to drop to 26-27 km per day in FY20 due to limited budgetary support, risk aversion among public sector banks to fund infrastructure and high cost of land acquisition are main reasons. In FY19, national highways construction rate had improved to around 30 km per day.The housing sector in urban and rural areas is not picking up to make up the loss arising in infrastructure sector.

Boost from lower tax outgo
Earnings growth for India Inc, which has been on first gear in recent times, is all set to receive a boost from lower tax outgo, with the reduced corporate tax rates. For many manufacturing companies, the savings on this front could give them room to reduce prices or improve other spends, thereby spurring demand. Many companies in sectors such as infrastructure, capital goods and FMCG stand to gain. Some others in the auto, steel, oil and gas, and real-estate segments could also get a leg-up. IT companies may be better off under the current regime though, given the lower tax incidence at present, says a report from Business Line.

Providing near-term boost
Indian Railways has been generous is passing on concessions to cement industry. From October-June, the cement companies need not pay 15 per cent busy season surcharge for transportation of cement and also done away with 5 per cent freight charges on loading mini rakes.

"Considering the current base rate of Rs 727/tonne per 500 km and railway freight proportion of 30 per cent cement industry would be saving approximately over Rs 600 crore in the second half of the year 2020," said Binod Modi, an analyst at Reliance Securities. The numbers will be different for different cement companies. Among pan-India cement makers, ACC is likely to benefit the most, given its higher dependence on the Railways. Analysts at Edelweiss Securities estimate Rs 30/tonne cost savings for the sector.

In response to the tax cuts, analysts have upgraded their earnings per share (EPS) target for cement manufacturers. The main contributors like demand and price have still not been addressed in that case the picture may not improve much. The overall capacity utilisation of the industry would remain below 70 per cent in the near term.

Big cos. to benefit
Full tax-paying companies such as UltraTech Cement, JK Cement and Orient Cement are likely to benefit the most. Still, the move is unlikely to have any impact on the capex cycle, as the sector is now cautious on capacity additions. Impact on working capital cycle, though positive, may not be material, according to UBS.

Infrastructure a cut in corporate tax is a positive for construction companies as most of them are paying full tax rate. All these companies will move to 25 percent tax regime, boosting their EPS by 7-12 per cent, according to Phillip Capital. Reduction in tax rate will also enhance cash flow, and hence ease the working capital situation, the brokerage said.

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