Wishing You a Joyous Dussehra! Celebrate the victory of good decisions in your financial journey!
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Wishing You a Joyous Dussehra! Celebrate the victory of good decisions in your financial journey!
Build a Balanced Portfolio: Get 20% off on two or more services. | Avail Offer
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September 25, 2019
|On Friday, 20 September 2019, the stock markets recorded single day unprecedented gains with the BSE Sensex rose 1,921.15 points to reach 38,014.62, and the NSE Nifty rose 569.40 points to reach 11,274.20. The sole reason for this rise was tax announcements by the Finance Minister, Nirmala Sitharaman.
In an unexpected move, the Finance Minister announced a reduction in the corporate tax rate by 10% bringing it down to 25.17% (including surcharge and cess) from 34.95%. This is a much-needed booster for the Indian economy, which has been plagued by demand-side concerns. It is expected that the corporate tax cut will boost sectoral earnings by ~10% and be a particular boon for both corporate and manufacturing segments.
Background
The July 5, 2019 Union Budget had increased the surcharge for the super-rich (non-corporate) from 15% to 25% for incomes between Rs. 2 crore and 5 crore and from 15% to 37% for those with higher incomes. This decision particularly hit Foreign Portfolio Investors (FPIs) hard,which till this quarter through September 18, 2019, sold USD 4.9 billion of Indian stocks. The government has since then been taking band-aid measures like announcing reversal to the tax hike, etc., while RBI announced a 100-bps rate cute. However, none of these announcements impacted the markets till the latest one, which came as a pleasant surprise to most.
In terms of the details of the announcement, here are the key highlights:
The corporate tax cut and allied reforms means that India is now attractive as an investment destination. The government is expected to lose Rs. 1,45,000 crore in revenue, but that number maybe smaller as the resulting boost andelasticity have yet to be factored. The loss of the government though will be a gain for corporates, whose profits will surge. FPIs trends can now reverse as India regains its sheen as an attractive investment destination. Key sectors which stand to gain from the announcements are:
The corporate tax cut has the potential to unleash animal spirits in the Indian economy and increase the competitiveness of the country as India now finds itself amongst the club of countries with lowest corporate taxrates,with taxes lower than Indonesia, Thailand, Vietnam and Malaysia. The resulting increase in profits could restore hiring, which has suffered in recent years, and bring back demand and consumption that have faltered. The move is historic and of extreme significance in terms of economic history of the country.