How the tax rate cut will impact earnings of top listed companies

Combined tax liability of companies in higher tax bracket is likely to reduce by Rs 45,000 crore

The cut in corporation tax will give a one-time boost of 13.2 per cent to corporate net profit and earnings per share of India’s top listed companies that are paying higher taxes based on their FY19 financials. 

Under the new tax regime, companies’ combined tax liability is likely to reduce by around Rs 45,000 crore compared to what they paid in FY19. This excludes deferred tax and refunds and only includes current taxes. This is combined savings for 490 companies that are part of BSE 500, BSE MidCap and BSE SmallCap index and whose effective tax rate was greater than 25.2 per cent last financial year. 

The analysis assumes no change in tax liability for those who currently pay less than 25.2 per cent of their profit before tax.

The tax cut is expected to boost Nifty50 index companies’ combined net profit or earnings per share by around 12.6 per cent or around Rs 26,000 crore based on their profit and loss account for FY19. The index companies reported combined net profit of around Rs 3.56 trillion in FY19. The index companies paid around 30.3 per cent of their pre-tax profits as corporate income tax in FY19. 

These 490 companies in the Business Standard sample paid corporate tax worth Rs 1.75 trillion in FY19 on a profit before tax of Rs 5.16 trillion translating into effective tax rate of 33.9 per cent FY20. Assuming every company is now taxed at new rate of 25.17 per cent, total tax savings for companies that were profitable on pre-tax basis last financial year works out to be Rs 44,828 crore. 

Of this nearly Rs 28,500 crore would accrue to non-financial companies while the rest will flow in to banks and non-banking financial companies. Of the latter public sector banks (PSBs) are likely to save only Rs 160 crore as there were only two profitable banks with effective tax rate higher than 25.2 per cent in FY19. 

This, analysts say, will improve corporate and investor sentiment besides improving India Inc’s cash flows that they can use to either make fresh investments or reduce liabilities. “This takes care of some of the cash crunch that the corporate sector has been facing recently. Companies can choose to invest this money, make acquisitions, boost dividend pay-out or buy back shares. This should start moving things at least in the corporate sector,” said Dhananjay Sinha, chief strategist and economist, IDFC Securities.

Some also see indirect gains for the overall demand in the economy which has been a key concern for corporate India. “There is an expectation that corporates, especially the profitable ones, will share at least a part of the savings in taxes with employees by way of bonuses or higher than expected salary increments. This will boost consumer demand that has been a bottleneck for the economy,” says Devendra Pant, chief economist, India Ratings.

Others are not as optimistic though. “It’s a great move for equity markets and shareholders as they get a one-time boost in corporate earnings. But it will do little to boost the aggregate demand in the economy as its doesn't increase the purchasing power of individuals and households,” says Madan Sabnavis, chief economist, CARE Ratings.

He also says that gains from tax cuts will also be blunted by its differential impact on various companies. “Most industries and companies may not gain at all or could even see a rise in effective tax rate is they choose to forgo all the tax shelters and exemptions that they already enjoy,” he adds.

The argument has some merit. Among the country's top companies, the biggest beneficiaries would be companies such as HDFC Bank whose earnings per share is likely to be up nearly 20 per cent or Rs 4,300 crore based on its profit before tax in FY19. Other key gainers would be ICICI Bank (Rs 2,944 crore), ITC (Rs 1,372 crore), ONGC (Rs 2,089 crore), Coal India (Rs 1,740 crore), Larsen & Toubro (Rs 1,023 crore), Kotak Mahindra Bank (Rs 805 crore) and Bajaj Finance (Rs 531 crore).