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  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  MARCH 1, 2005

    Corporate Tax: What's the impact?
    MYSTOCKS | FREE NEWSLETTER

    We analyse the impact of the lowering of corporate income tax in the budget proposal yesterday by analyzing the performance of the Quantum Universe of 300 companies in the last four quarters. This includes the tax paid, the effective tax rates and what is the upside.

    Before going any further, consider the budget proposals first:

    1. For domestic companies, the corporate income tax rate to be 30%, plus a surcharge of 10%.

    2. The rate of depreciation is fixed at 15% for general machinery and plant with the initial depreciation rate to be increased to 20%. Requirement of 10% increase in installed capacity for availing of the benefit of initial depreciation to be removed.

    3. The benefits that are usually enjoyed collectively by the employees and cannot be attributed to individual employees shall be taxed in the hands of the employer. The tax to be called 'Fringe Benefits Tax' at 30% on an appropriately defined base. Transport services for workers and staff and canteen services in office or factory to be outside the tax net

    The upside…
    The graph here highlights the effective tax rate of the Quantum Universe of 300 companies in the last four quarters. The following are some key observations:

    1. Against the actual tax rate of 37.5% (including the surcharge and the cess), the effective tax rate of the 300 companies under consideration was 28.8% (based on the trailing twelve months basis).

    2. Even if one were to exclude the loss making companies from this list, the effective tax rate is marginally lower at 28.1%.

    Now, given the fact that corporate income tax has been reduced from 35% to 30%, for simplistic purpose, if one were to reduce the effective tax rate to 23.1% (28.1% minus 5.0%), net profit increases by as much as 7%.

    Effective tax rate (%)
    The highest...* The lowest...*
    Tata Infomedia 48.9 Zensar 1.9
    Color-chem 53.4 Caprihans 2.0
    EIH 53.8 Sun Pharma 3.3
    Parry's Confectionary 54.5 Mastek 3.5
    VST Ind 56.3 Sterlite Ind 3.5
    Mukta Arts 61.5 Rallis 3.8
    Essar Oil 67.1 HCL Tech 4.0
    VIP 77.1 Hexaware 4.2
    Guj. Fertilisers 84.4 VisualSoft 4.8
    Dr. Reddys 88.6 Birla Corp 5.2
    *Trailing twelve months

    The downside…
    Following are some of the factors that could subdue the upside to net profit.

    1. Surcharge has been increased from 8% to 10%.

    2. Depreciation rates have been changed. Based on our interaction with two companies, the finer points have to be considered before capturing the upside or the downside.

    3. Fringe Benefit Tax has been introduced at 30%, though select amenities to employees like canteen and transportation services have been excluded. This will further reduce the benefit at the hands of the corporates.

    4. The reduction in corporate income tax is not applicable to foreign companies. In fact, the increase in surcharge will actually add to the tax liability.

    On the balance, we believe that in the BSE 'A' group, most of the companies has aggressive capital expenditure plans in the next three to five years. This reduction in corporate tax and modifications in the depreciation rates is likely to be earnings accretive in nature and to that extent, we will have to upgrade earnings of most of the companies under our research coverage.

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