While the move to bring down corporate tax to 25% over the next four years is a positive, corporates will end up paying higher in the next fiscal given the surcharge hike to 12%. Effective corporate tax will increase to 34.60% from 33.99 while those that are under MAT would pay 21.34% from 20.96%. The removal of exemptions and its impact will also need to be looked at before the corporate sector can rejoice.
Companies that are paying full rates will see their earnings, cash flows as well as valuations improve over the long term as taxes reduce from the higher rate to the new lower tax slab starting 2016-17.
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Among key sectors, companies in the auto sector such as Apollo Tyres and Tata Motors which get a substantial chunk of their revenues from subsidiaries located outside the country may not be able to take advantage of this while some plants of other auto companies (TVS, Bajaj Auto, Ashok Leyland) are located in tax free zones so they pay lower than the statutory rate. Ambit analysts believe that the real benefits will start flowing from FY19 post the expiry of the tax breaks.
Among refiners, except companies such as Reliance Industries, Essar Oil and Cairn which pay lower than full rate, PSU refiners are likely to benefit given the high tax rates.
In the pharma space, foreign multinational companies will stand to gain as most of them pay at the full rate of about 33% while among large Indian companies Lupin and Glenmark could be a beneficiary as they pay over 30%. Other major pharma companies are paying minimum alternate tax and will have a minimal impact from the reduction in the corporate tax rate.
Similary, MNCs in the FMCG space will stand to gain as most of them pay at the higher rate. Among major companies, Dabur and Godrej Consumer pay around the 20% mark so the gain will not apply to them.
The reduction in corporate tax will have a marginally positive impact on the major software companies such as Infosys which pays about 28-29% tax. The other biggies such as TCS, Tech Mahindra, HCL Technologies and Wipro are in the 20-25% mark.
Most large banks pay upwards of 25% and hence should see lower tax outgo from 2016-17. While most capital goods companies pay at rates over 30%, a large chunk of cement, construction and steel companies pay below the 25% mark.