RBI Decided to Keep Repo Rate Unchanged to 5.15% (5th December, 2019)

Introduction

Reserve Bank of India (RBI) in its fifth Bi-monthly monetary policy meet of FY2019-20, decided to keep repo rate unchanged to 5.15% on 5th December 2019. Also, RBI decided to continue with the Accommodative stance of monetary policy and also lowered GDP growth projections to 5% from 6.1% for FY2019-20. Lets discuss the key highlights of monetary policy in detail.

RBI Monetary Policy Highlights Dec 2019 – Repo Rate Kept Unchanged

• On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its 5th Bi-monthly meeting on 5th December, 2019 decided to keep the policy repo rate unchanged at 5.15%.
• The MPC also decided to continue with the Accommodative stance of monetary policy as long as it is necessary for reviving growth.
• These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

1. RBI decided to keep Repo Rate unchanged at 5.15%

• On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its 5th Bi-monthly meeting on 5th December, 2019 decided to keep the policy repo rate unchanged at 5.15%.
• Consequently, the reverse repo rate remains unchanged at 4.90% and the Bank Rate at 5.40%.
• In 2019, the RBI has cut repo rate by 135 basis points so far to a nine-year low of 5.15%. Analysts were expecting another 25 basis points cut. However, Monetary Policy Committee surprised, shocked even, many observers of the Indian economy by announcing that it would not cut the repo rate as it announced its Dec-19 monetary policy review.

2. RBI to Continue with the Accomodative Stance

• RBI has decided to continue with the Accomodative stance of monetary policy as long as it is necessary to revive growth.
• It is prudent to remain accomodative as stated by MPC. In the second bi-monthly policy review of FY20 held in June 2019, MPC had changed the monetary policy stance from neutral to accomodative.
• A significant weakening of growth impulse, slowdown in investment activity and a continuous moderation in private consumption growth is a matter of concern, as noted by MPC.
• On account of the slowdown in the above mentioned macroeconomic indicators, RBI sees scope to accommodate growth by supporting efforts to boost demand and re-energize the private investment activity.

3. Revision in GDP Projections to 5% from 6.1% for FY2019-20

• GDP growth for 2019-20 is revised downwards from 6.1% in the Dec policy to 5% on account of weakening of both domestic and external demand conditions.
• In the last MPC meet (Oct-19), GDP growth was revised to 5.3% in Q2: FY2019-20. However, the actual GDP growth for Q2: FY2019-20 slumped to 4.5%, the lowest in more than 6 years and it is significantly lower than projected number (5.3%).
  • It is due to significantly lower than expected GDP number in September quarter ie. 4.5% from 5% in June quarter.
  • Various high frequency indicators suggest that domestic and external demand conditions have remained weak. The business expectations index of the Reserve Bank’s industrial outlook survey indicates a marginal pickup in Q4.
• GDP growth projections are in the range of 4.9-5.5% for H2: FY2019-20, with risks evenly balanced.
• While, GDP growth for H1: FY2020-21 is also revised downwards to 5.9-6.3%.
• The GDP projections for H2: FY2019-20 and H1: FY2020-21 are made on the following positive outlooks.
• The impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand.
• Several measures announced by the Government to boost growth :
  • Corporate Tax Rate Cut
  • Withdrawal of Higher Surcharge on sale of Equity by FPIs as well as domestic investors
  • No Tax on Buyback of shares announced prior to 5th July, 2019
• The above measures are expected to revive sentiment and spur domestic demand, especially private consumption in coming quarters.

4. Revision in CPI Inflation

• RBI has revised Consumer Price Index (CPI) inflation upwards :
• H2: FY2019-20 in the range 4.7-5.1%
• H1: FY2020-21 at 3.8-4%, with risks evenly balanced.
• Following are the key driving factors which are taken into consideration by MPC for the revision in CPI forecast :
  1. Rise in food inflation on account of upsurge in prices of vegetables and incipient price pressure in other food items like milk, pulses, sugar.
  2. Volatile Crude-oil prices due to Geo-political tensions
  3. Near-term Price pressures due to volatile currency

5. Transmission Process

• The success of the accommodative policy would depend entirely on the transmission of the lower rates to the ultimate borrowers. Thus the key determining factor of expected favourable results of earlier 135 points repo rate cut by RBI is the effective cascading of the benefits of lower base rate by the banks. 
• In simple words, when RBI cuts repo rate, banks should immediately cut the interest rates of the loans. Interest rates of home loans, vehicle loan or business loans should be come down hand-in-hand.
• RBI is focusing on quick transmission of lower interest rates to the borrowers, issuing loans from the banks. RBI has already made it mandatory for the banks to link the interest rates on loans to the repo rate.

6. RBI raised Exposure Limit of NBFC-P2P Platform & removed Escrow Account requirement

• On Peer to Peer (P2P) Lending Platform, RBI :
  • Raised the aggregate exposure limit to Rs.50 Lakh from earlier Rs.10 Lakh
  • Proposed to do away the current requirement of escrow account to be operated by bank promoter trustee for the transfer of funds across P2P platform
• Consequences of increase in aggregate exposure limit to Rs. 50 Lakh in P2P lending platform :
  • The existing High Net Worth (HNI) investors on P2P platform can scale up their investments
  • More HNIs would look at peer-to-peer lending as an investment option, which is a very positive sign for the industry
  • The increased limit will ease credit supply benefiting MSMEs
  • Due to removal of escrow account requirement in P2P lending platform, it will provide more flexibility in operations

When India’s Economic Slowdown Will End?

Introduction

In this article, we are going to discuss the current economic slowdown in India and the different types of economic states in detail.

Which economic state currently India is going through, is Indian economy is heading towards recession? what lies ahead? Let us try answer all these questions here. Also, let us discuss the historical economic cycles Indian economy has gone through and how the market cycle is related to the economic cycles. You can also check out our Economic Indicators monthly report with all the latest stats and analysis – https://investyadnya.in/books/india-economic-indicators-report-&-analysis

Economic Slowdown In India | What Lies Ahead ?

Types of Economic States

• There are 4 economic states :
  1. Economic Slowdown
  2. Economic Boom
  3. Peak
  4. Stagflation
• There are 2 important factors which plays a key role in determination of economic state :
  1. Growth
  2. Inflation
• The above 4 states depend upon range within which the growth and inflation percentage lies.

Let us discuss each of the above mentioned 4 economic states one by one.

1. Economic Slowdown

• In this type of economic state, both Inflation as well as GDP growth rate are low. (GDP – Gross Domestic Product)
• In Indian context,
  • Low Inflation is 3-4%
  • Low GDP Growth rate is 5-6%
• The current state of Indian economy is low inflation and low economic growth. As we can see, in June-2019 quarter, India’s GDP growth rate has come down to 5% from 5.8% in March-2019 quarter. It means India is currently going through an economic slowdown.
• On the other hand, Recession means the contraction of GDP of the economy, where GDP growth rate is negative.

2. Economic Boom

• Economic Boom is the situation where GDP growth rate is high, but inflation is on lower side.
• In Indian context,
  • Low Inflation is 3-4%
  • High GDP Growth rate is 8-9%
• This is a very unique situation, where performance of the economy is magnificent. Here, overall market sentiment as well as performance is very good.

3. Peak

• Economic Peak is the economic state where an euphoric valuations enters into the market. Here, there is high inflation and high GDP growth rate in the economy.
• In Indian context,
  • High Inflation is 7-8%
  • High GDP Growth rate is 8-9%
• During this phase, as asset prices shoot up, so caution is thrown to the wind. Market sentiments may not be rational. Investors may not behave in a sensible and a careful way, the situation where greater fool theory plays out everywhere. Valuations reach extreme levels during the peak phase.

4. Stagflation

• The forth type of economic state is known as Stagflation. In this state, inflation is on higher side, while GDP growth rate is very low.
• The term Stagflation is derived from :
  • Stagnation of economic growth and
  • Inflation on higher side
• In Indian context,
  • High Inflation is 7-8%
  • Low GDP Growth rate is 5-6%
• Stagflation is a period of rising inflation but falling output and rising unemployment. Economist term it as a stagnation state where there is a rise in inflation and a fall in the growth rate.
• The Stagnation is caused by supply-side shocks like rising oil prices, falling productivity, rise in structural unemployment etc.
• This is less damaging than higher inflation and negative growth. But, it still represents a deterioration in the trade-off between unemployment and inflation.

Historical Economic Cycles

1. Economic Slowdown (2002-03) :
   • After IT Bubble burst in 1999-2000, for the next 2 years in 2002-03, economy was going through a slowdown phase. Thus, lower inflation around 3-4% and lower GDP growth rate 5-6% was seen in 2002-03. And the same situation is there in 2019-20 also where Inflation as well as GDP growth rates are ranging in their lower side.
   • And the subsequent phase – economic boom is going to come in coming years due to various government’s and RBI’s measures to boost economic growth.
2. Economic Boom (2005-06) :
   • The period of 2005-06 is the situation of economic boom on global front and India was also indirectly connected to the same. Here, inflation was 3-4% and GDP growth was 8-9%.
3. Peak (2007-08) :
   • Here, inflation as well as GDP were on higher side. Inflation was 7-8% while GDP growth rate was 8-9%. There was a great corporate earnings. The profitability of the companies was grown at almost 15-20% YoY.
   • And thereafter, market fell after 2008 Lehman’ Crisis. Though India was not directly coupled with the worse impact of the crisis, but the dependency of Indian markets in terms of liquidity was majorly on FIIs. Due to the same reason, Indian market was also adversely affected.
4. Stagflation (2011-13) :
   • Here, GDP growth rate is lower side and inflation is on higher side. Stagflation was incurred in 2011-13.
   • There were a number of factors responsible for rising inflation. And at the same time, government was failing to boost the GDP growth rate.

Comparing Economic Slowdown in 2002-03 and 2019-20

• As we have earlier mentioned the economic condition in 2002-03 and 2019-20 seems to be the same with the lower inflation rate 3-4% and the lower GDP growth rate 5-6%.
• If we compare from the valuation side, PE ratio in 2002-03 was around 15-16, while current PE is around 25-26. PE ratio is increased due the earnings growth of about 13-15% in the absolute terms for the entire period between 2002-03 and 2019-20.
• The steady or flat trend in the Earnings per share (EPS) has contributed in the increased PE ratios of the corporates.
• The higher outflow from FIIs are partly compensated by the Domestic Institutional Investors like Mutual Funds, Insurance Companies etc. Various ETF funds have also supported the market by inducing the required liquidity in the market.
• Thus, these balancing factors were responsible for the lesser corrections seen in the markets currently.

Conclusion

• With an aim to acquire $5 Trillion economy status, India has to consistently achieve a minimum of 9%+ growth rate for next five years.
• On the other hand economic indicators reflect that the GDP growth of India has gone down to almost 5% in the first quarter of financial year 2019-20.

RBI Monetary Policy Meet Highlights (4th October, 2019)

Introduction

Reserve Bank of India, RBI cuts repo rate by 25 bps from 5.40% from 5.15% on 4th October 2019. RBI decided to continue with the Accommodative stance of monetary policy and also lowered GDP growth projections to 6.1% from 6.9%, in its forth Bi-monthly monetary policy meet of the financial year 2019-20.

RBI Cuts Repo Rate By 25 bps to 5.15% – Monetary Policy Meet Key Highlights

• On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting on 4th October, 2019 decided to reduce the policy repo rate by 5 basis points to 5.15% from 5.40% with immediate effect.
• The MPC also decided to continue with the Accommodative stance of monetary policy as long as it is necessary for reviving growth.
• These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

1. RBI cuts Repo Rate by 25 bps to 5.15% from 5.40%

• RBI cuts repo rate by 25 basis points to 5.15% from 5.40% with immediate effect. Consequently, the reverse repo rate adjusted to 4.90 from earlier rate 5.15% and the marginal standing facility (MSF) rate and the Bank Rate to 5.40%.
• This is the fifth consecutive repo rate cut since Shaktikanta Das took over as the governor in December 2018. RBI had cut the policy rate by 110 basis points prior to this, through 3 rate cuts of 25 bps each in February, April, June and one ate cut of 35 bps cut in August MPC meet.

2. RBI to continue with Accomodative Stance of Monetary Policy

• RBI has decided to continue with the Accomodative stance of monetary policy as long as it is necessary to revive growth.
• It is prudent to remain accomodative as stated by MPC. In the second bi-monthly policy review of FY20 held in June 2019, MPC had changed the monetary policy stance from neutral to accomodative.
• A significant weakening of growth impulse, slowdown in investment activity and a continuous moderation in private consumption growth is a matter of concern, as noted by MPC.
• On account of the slowdown in the above mentioned macroeconomic indicators, RBI sees scope to accommodate growth by supporting efforts to boost demand and re-energize the private investment activity.

3. Revision in GDP Projections to 6.1% from 6.9% for FY2019-20

• GDP growth for 2019-20 is revised downwards from 6.9% in the August policy to 6.1% on account of weakening of both domestic and external demand conditions.
• In October MPC meet, GDP growth is revised to 5.3% in Q2: FY2019-20
  • It is due to significantly lower than expected GDP number in June quarter ie. 5% from 5.8% in previous quarter. Various high frequency indicators suggest that domestic demand conditions have remained weak.
  • The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3. Export prospects have been impacted by slowing global growth and continuing trade tensions.
• Also, GDP growth projections are in the range of 6.6-7.2% for H2: FY2019-20, with risks evenly balanced.
• GDP growth for Q1: FY2020-21 is also revised downwards to 7.2%.
• The GDP projections for H2: FY2019-20 and Q1: FY2020-21 are made on the following positive outlooks.
• The impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand.
• Several measures announced by the Government to boost growth :
  • Corporate Tax Rate Cut
  • Withdrawal of Higher Surcharge on sale of Equity by FPIs as well as domestic investors
  • No Tax on Buyback of shares announced prior to 5th July, 2019
• The above measures are expected to revive sentiment and spur domestic demand, especially private consumption in coming quarters.

4. Revision in CPI Inflation

• RBI has revised Consumer Price Index (CPI) inflation 3.4% from earlier 3.1% for Q2: FY2019-20 and 3.5-3.7% for H2: FY2019-20, with risks evenly balanced. CPI inflation for Q1: FY2020-21 is projected at 3.6%.
• Following are the key driving factors which are taken into consideration by MPC for the revision in CPI forecast :
  1. Impact of recent policy rate cuts
  2. Rise in food inflation driven by uneven temporal monsoon in 2019
  3. Volatile Crude-oil prices due to Geo-political tensions in middle-east
  4. Ease in the output prices by the manufacturing firms as stated in the industrial outlook
  5. Near-term Price pressures due to volatile currency

5. Transmission Process

• The success of the accommodative policy would depend entirely on the next level of its application, that is, the transmission of the lower rates to the ultimate borrowers. Thus the key determining factor of expected favourable results of repo rate cut by RBI is the effective cascading of the benefits of lower base rate by the banks. 
• In simple words, when RBI cuts repo rate, banks should immediately cut the interest rates of the loans. Interest rates of home loans, vehicle loan or business loans should be come down hand-in-hand.
• The rate cut has sent a strong signal to domestic banks to cut lending rates before the festive season kicks off in September. 
• The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last meeting of the MPC.
• RBI is going to focus on quick transmission of lower interest rates to the borrowers, issuing loans from the banks. Also, RBI has already made it mandatory for the banks to link the interest rates on loans to the repo rate.

Measures to Boost Payments System

• Liquidity Support for the Proposed 24×7 National Electronic Funds Transfer (NEFT) System
  • It was announced in the third bi-monthly Monetary Policy of August 7, 2019 that the Reserve Bank of India will make available the facility of National Electronic Funds Transfer on 24×7 basis for members of public from December, 2019.
  • In order to facilitate smooth settlement of these transactions in the accounts of the banks maintained with the Reserve Bank, it has been decided that RBI will extend the collateralised liquidity support 24*7, which is currently available till 7.45 pm on NEFT working days.
  • This will help in better funds management by banks.

Market Fall Post Repo Rate Cut Announcement

Summary

• On account of US Fed’s rate cut Global rates are cycling down. Oil and commodity prices are also slipping on global uncertainty. The domestic inflation outlook remains liberal.
• Domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remained sluggish.
• Even as past rate cuts are being gradually transmitted to the real economy, the liberal inflation outlook provides headroom for policy action to close the negative output gap.
• The growth concerns are addressed by MPC by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate (4% within a band of +/- 2%).
• The minutes of the MPC’s meeting will be published by October 18, 2019. The next meeting of the MPC is scheduled during December 3-5, 2019.

Corporate Tax Rate Cut – Good Move or Bad Move?

Introduction

In this article, we are going to discuss the pros and cons of Corporate Tax Rate Cut announced recently by Finance Minister Nirmala Sitharaman in an attempt to boost the Indian economy. Let’s analyse whether the Corporate tax rate cut is a good move or bad move?

Pros & Cons of Corporate Tax Rate Cut | Good Move or Bad Move?

Corporates in India will be taxed at 22% from 30% earlier rate and an effective rate of 25.17% including surcharge and cess. The tax cut came as Indian Prime Minister Narendra Modi’s government attempts to spur the country’s slowing economy.

So lets analyse the pros and cons of corporate tax rate cut in detail.

Pros of Corporate Tax Rate Cut

1.Support to Indian Corporates (Increased Earnings)

• The move of corporate tax rate cuts will provide a big support to corporates in India. With the tax cuts, the post-tax earnings (PAT) of the companies is going to rise considerably.
• For Example :
  • HDFC Bank earlier used to pay 35% tax on Profit before Tax earnings (PBT). So, its post-tax earnings was 65% of PBT. However, now due to corporate tax rate cuts by the government, HDFC Bank now need to pay only 25.17% effective tax (including surcharge and cess) on its PBT earnings.
  • So, the resultant post-tax earnings left with the bank is 74.83% of PBT v/s earlier 65%. So, there is increase of 9.83% which will play a considerable role in the overall profitability of the bank.

2. Multiplier Effect on GDP – Supply Side Measure

• Tax Multiplier Effect
  • One way to assess the growth impact of the corporate tax cuts is to look at the tax multiplier of growth. The measure is used to capture the impact of an increase or a reduction in tax on GDP of the country.
  • Thus, a change in tax rates results in a multiplier effect. The tax multiplier tells that how big of a change you will see in GDP as a result of a change in tax rates.
  • According to the economists, the corporate tax multiplier has been estimated at approximately -1. The value of about -1 implies that a fall of about Rs.1.45 Lakh crore in corporate tax collections by the government could raise the GDP by about Rs.1.45 Lakh crore by the end of the year, where both are measured in nominal terms.
• Expenditure Multiplier Effect
  • The expenditure multiplier effect tells the magnitude of how much real GDP will change in response to an autonomous change in aggregate spending. The capital expenditure effect on GDP is the highest at about 2.5 times.
  • The boost to bottom-line for companies is likely to manifest in the form of
  • Higher Investments and Capital Expenditure (Capex) : It will improve productivity and increase output. In turn, results in lower product prices charged to the customers.
  • Higher Returns to Stakeholder :
    1. Dividend Payouts to Shareholders
    2. Higher Incentives to Employees
• This is likely to boost investments and consumption as well as demand in the economy over the long term. Thus, the increased consumption and expenditure will have a cascading impact over the long term and will contribute to increase in the GDP growth rate of the country.

3. Support to Capital Market

• After the announcement of corporate tax rate cut on Friday, 20th September, there was a big positive momentum seen in the capital markets. Sensex have shown a big rally of 3300 points in just 2 days (Friday and Monday).
• Domestic Institutional Investors (DIIs) and Foreign Institutional Investors (FIIs) were the key active participants. The total net buying of DIIs and FIIs was Rs.6,013.1 Cr in these 2 days. (Please refer above table for details).
• This shows how big is the support offered to the capital markets by government’s corporate tax rate cut move.

4. Competitive Tax Rates Compared to Asian Peers

• With the rate cut in corporate tax, India now came closer to the rates prevalent in many of the emerging and industrialized countries.
• The new corporate income tax rates in India will be lower than USA (27%), Japan (30.62%), Germany (30%), Brazil (34%), Philippines (30%), SriLanka (28%) and is similar to China (25%) and Korea (25%).
• The government hopes it will make India more appealing to multinational manufacturers that are preferring countries such as Vietnam, Taiwan, Thailand (20%) and Malaysia(24%).

Cons of Corporate Tax Rate Cut

A cloud of questions hovers above the real impact of the corporate tax rate cut announced by the Indian government. There are many cons of this move.

1. Fiscal Deficit May Increase

• The primary concern is how the tax cut will make up for the lost revenue? The tax rate cut measure involves forgoing Rs.1.45 lakh crore ($20.45 billion) in annual revenue.
• This tax revenue lost is about 0.7% of India’s GDP. It means the tax cut move will cost the government about 0.7% of GDP each year.
• The corporate tax rate cut will widen the government’s fiscal deficit from the current target of 3.3% to 4% of GDP this financial year.

2. Government May Decrease Spending to Manage Fiscal Deficit

• In order to cater the widened fiscal deficit, there might be a constraint on government spending. Government may decrease spending to manage the fiscal deficit targets.
• However, reduced government spending on infrastructure and other needful measures would hamper the further growth and job opportunities in the economy. So, reducing government spending would not be a correct way to tackle widened fiscal deficit numbers.
• Government can use the surplus received from RBI to manage the gap. Also, the divestment would provide the necessary funds support to the government. Selling the stake in BPCL, Container Corporation and Air India would be a key upcoming step by the government.

3. Corporates May Use Increased Earnings in Debt Repayment

• Given the nature of the current slowdown, which is mainly due to weak consumer demand, there is no reason to imagine that private companies will invest more if their tax outgo decreases.
• If consumers are not spending in the first place due to high unemployment and diminishing wages, then additional investments become risky.
• So, there might be possibility of using the increased earnings of the corporates in repayment of their existing debts instead of more investments.

4. Demand Side Measures Requirement May Rise

• The real problem India facing is not that it is too expensive to do business but the fact that there is no demand. So, the demand side measures requirement may rise.
• Key Demand Side Measures are :
  • GST Rate Cut
    • Cutting goods and services taxes which would reduce prices, would be a more effective way to boost consumer demand.
    • Because, to boost consumption, the prices of goods and services that the consumers are buying should be reduced.
  • Personal Income Tax Rate Cut
    • Cut in personal income tax would have had a wider impact on consumption and demand improvement.
    • That is why an effective solution is to increase consumers’ disposable incomes by a direct injection of investment.

How Corporate Tax Rate Cut Will Impact the Economy?

Introduction

Finance Minister Nirmala Sitharaman, on Friday 20th September, announced corporate tax rate cut and many other measures to boost the growth in the economy. Let us discuss these measures and their impact on the economy.

Corporate Tax Rate Cut by FM Nirmala Sitharaman – A Key Measure to Revive Economy

Key Announcements By Finance Minister

1. To Promote Growth and Investment

• Government has done the corporate tax rate cut from 30% earlier to 22% with effect from FY 2019-20. It will allow any domestic company an option to pay income-tax at the rate of 22%. However, it is subject to condition that they will not avail any exemption/incentive.
• The effective tax rate for these companies shall be 25.17% inclusive of surcharge & cess.
• Also, such companies don’t need to pay Minimum Alternate Tax.

2. To Attract Fresh Investment in Manufacturing

• Government has done a new provision to attract fresh investment in Manufacturing and thus, to provide boost to ‘Make-in-India’ initiative.
• Any new domestic company incorporated on or after 1st October 2019 making fresh investment in manufacturing will have an option to pay tax at 15% from FY 2019-20. The effective tax rate for these companies shall be 17.01% inclusive of surcharge & cess.
• This benefit is available to those companies which :
  • Do not avail any exemption/incentive and
  • Will commence their production on or before 31st March, 2023
• Also, such companies don’t need to pay Minimum Alternate Tax.

3. For Companies Not Opting for the Above Concessional Tax Regime

• A company which avails the tax exemption/incentive shall continue to pay tax at the pre-amended rate. However, these companies can opt for the concessional tax regime after expiry of their tax holiday/exemption period.
• After exercise of the above Concessional Tax Regime option, the companies shall be liable to pay tax at the rate of 22%. And the option once exercised cannot be subsequently withdrawn.
• For companies who continue to avail exemptions/incentives, minimum alternate tax (MAT) rate has been reduced from 18.5% to 15%.

4. To Stabilise the Flow of Funds into the Capital Market

A higher surcharge, announced in the July 2019 Budget, on capital gains on sale of equity and Equity-oriented funds made by foreign portfolio investors (FPIs) as well as individuals and other classes of domestic investors, is gone.

5. Tax Relief on Buy back of Shares of Listed Companies

There will be no tax on buyback of shares by listed companies that have made a public announcement of buyback plans before July 5, 2019.

6. Expanded the Scope of CSR 2% Spending

• Corporates can spend their CSR 2% funds on incubators funded by Central or State Government or any agency or Public Sector Undertaking of Central or State Government.
• Thus, companies can now make contributions to public funded Universities like IITs, National Laboratories and Autonomous Bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology).
• These are the institutes engaged in conducting research in science, technology, engineering and medicine aimed at Sustainable Development Goals.

Comparing With Global Corporate Tax Rates

• With the rate cut in corporate tax, India now came closer to the rates prevalent in many of the emerging and industrialized countries.
• The new corporate income tax rates in India will be lower than USA (27%), Japan (30.62%), Germany (30%), Brazil (34%), Philippines (30%), SriLanka (28%) and is similar to China (25%) and Korea (25%).
• New companies in India with an effective tax rate of 17% is equivalent what corporates pay in Singapore (17%). The government hopes it will make India more appealing to multinational manufacturers that are preferring countries such as Vietnam, Taiwan, Thailand (20%) and Malaysia(24%).
• With a lower tax rate for new manufacturers, the government is looking to attract investment flowing out of China following its trade dispute with the US.
• However, India needs to also remove other major obstacles for multinationals like poor infrastructure, stringent labour laws, delays in land acquisition etc. Then only India is considered as an alternative destination to the neighbouring country.

What Will It Achieve?

This Corporate rate cut move will likely change the profitability dynamic of the Indian corporate ecosystem as a whole.

• Improved Profit Margin of Corporates : Lower taxes should result into higher profit margins. This should support their books.
• Lower Prices : Some of the companies with improved profit margins should be able to pass on their higher margins in the form of lower product prices to consumers.
• Increase in Investments & Capital Expenditure : Lower corporate income tax rates and the resultant change in profitability will likely prompt companies to invest more. It will result in raising their capital expenditure (Capex).
• Improvement in Employment Growth : Additional induced capacities by the companies will encourage hiring more employees and eventually lead to improvement in Employment Growth.

The Cost of Measure – How Will the Rate Cuts be Funded?

• The revenue foregone on reduction in corporate tax and other relief measures will be Rs.1.45 lakh crore annually.
• Thus, the added cost of these measures taken has triggered concerns of fiscal slippage. The government has set a fiscal deficit target of 3.3% of GDP for FY2019-20. Lower tax revenues could disturb the fiscal calculations, because the tax collections have been far below the budgeted estimates.
• The government may fund part of the revenue foregone because of corporate tax cuts through the additional transfer of dividends and surplus from the Reserve Bank of India (RBI).
• On 26th August 2019, RBI had decided to transfer RBI’s surplus funds of Rs.1.76 Lakh Crore to the Government.
• The total surplus funds of Rs.1.76 Lakh Crore transferred comprises of 2 parts :
  • Rs.1.23 lakh crore of surplus or dividend for the year 2018-19 and
  • Rs.52,637 crore was from surplus reserves or accumulated savings of RBI, which is the excess provision identified as per the revised Economic Capital Framework (ECF) recommended by Bimal Jalan committee.
• The government had budgeted for Rs.90,000 crore from RBI dividends. It now has an additional Rs.58,000 crore, which can be used to plug revenue gaps.