Impact of Corporate Tax Rate Slash on Banking-GK Updates

Exampundit.in

5 years ago

The government significantly reduced corporate tax rates boosting investor sentiment in the midst of a severe slowdown.

Corporate tax:

A Corporate Tax is a levy placed on firm’s profit by the government. The money collected from corporate taxes is used for a nation’s source of income.

A firm’s operating earnings are calculated by deducting expenses including the cost of goods sold (COGS) and depreciation from revenues.

Slash of Tax Rate:

The government all of a sudden announced a reduction in the corporate tax rate from 35 % to 25.17 % thereby fulfilling its key agenda of implementing the Direct tax Code (DTC).
It is a massive trigger for reviving up growth and, more importantly, resurrecting sentiments that were down in the dumps.
The immediate benefit of corporate tax cut is increased cash flows to corporate India that will be either channelized into debt reduction or incremental investments in increasing capacity.
The sectors like banking and FMCG are expected to grow at a CAGR of 48.2 per cent and 18 per cent, respectively vs. CAGR of 42.2 per cent and 12.2 per cent.
On the other side, sectors like IT and pharma are not expected to see any upgrades on account of existing lower tax rates.
The new provision has been added in the Income-Tax Act with effect from FY20 which allows any domestic company the option to pay income tax at 22 per cent subject to the condition that they will not avail any exemption/incentive.

Impact on Banking Industry:

Banks are expected to report 11-13 percent increase in Profit After Tax(PAT), leading to 1-3 per cent increase in Adjusted Book Value(ABV).
Large Private banks remain major beneficiaries with HDFC Bank reaping larger gains.
The finance Minister said on a statement that a new Domestic company incorporated on or after October 1, 2019 will pay income tax at the rate of 15%.
This comes with a effect that production should commence before March 31, 2023.
This move can hasten the privatecapex cycle and if it happens, credit growth will rise and banks would be key beneficiaries.
Government borrowing will go up to make up for the revenue foregone by reducing the Tax rate. It would exert upward pressure on interest rates. Hence it will have a mixed impact on banking industry.

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