You are here: Home » Companies » News
Business Standard

Two in three cos may shift to new corporation tax rates immediately: Crisil

Half of those shifting may use tax savings for ongoing capex to strengthen balance sheet

Ranju Sarkar  |  New Delhi 

tax cut
Representative Image

Two in three may shift to the new regime immediately, finds a survey of 850 large The reduction in rate announced by the government spawns optimism with a tinge of cautiousness among companies, it said.

"(There is) Optimism as most will benefit and intend to retain the savings to reduce funding constraints and strengthen balance sheets to be ready for fresh capex once demand revives. And cautiousness as the savings alone may not lead to immediate pick-up in fresh capex given the weak demand environment," Crisil said in a statement.

These finding are based on responses received in a survey of 850 large companies (by revenue), whose debt instruments it rates. The sample includes listed and unlisted companies across sectors.

As per the changes announced in the Income Tax Act, 1961, domestic companies have the option to pay at a reduced effective rate of 25.17 per cent. This is conditional upon their 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 automobiles, chemicals, textiles, gems and jewellery, and retail are likely to shift immediately.

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 kickstart the much-delayed private investments cycle, it could help ease funding constraints of companies to some extent.

About half 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.

Around 37 per cent of the companies surveyed are yet to decide on utilisation of tax savings though 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.

Overall, the tax cut provides much-needed impetus to companies to press the capex button once demand stages a comeback. India Inc’s credit outlook remains contingent upon this pick-up in demand.

First Published: Tue, October 15 2019. 19:52 IST
RECOMMENDED FOR YOU