31 March 2015
Rationalization of corporate tax rates
Identifying winners and losers
In FY15-16 Union Budget, the Government proposed to gradually
reduce the corporate tax rate from the current 30% to 25% during
FY17-19. In this report, we analyze the impact of reduction in
corporate tax rates on companies, including its implications on
deferred tax and minimum alternate tax credit.
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Marginal corporate tax rate of 34% v/s effective tax rate of
23.2%:
While the marginal corporate tax rate is higher at ~34%
(including surcharge and cess), the effective tax rate (ETR) is very
low at 23.2% in FY14 due to various exemptions/incentives. This
leads to excessive litigations and loss of revenue for the
Government. Among the corporate tax exemptions, accelerated
depreciation @ 20% on plant and machinery constitutes ~38% of
the major direct tax exemptions/incentives.
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The
ART
of annual report analysis
Marginal corporate tax rate v/s Effective
tax rate (ETR) in FY14: 34% v/s 23.2%
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ETR of private sector v/s public sector:
24.4% v/s 19.3% (difference of 510bp)
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Deferred tax and MAT also to be effected
by the reduction in tax rate
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Two-thirds of Nifty-50 companies have ETR above 23.2%:
Our
analysis of Nifty-50 companies (standalone financial statements)
suggests that nearly two-third companies have their tax rates
above India’s corporate ETR (23.2%). Cairn India and Sun Pharma
have the lowest ETR at 10.2% and 10.3% in 9MFY15, followed by
Bharti Airtel (16.1%) and HCL Technologies (18.5%) among the
Nifty companies. On the other hand, Punjab National Bank (40%),
Coal India (35%), Kotak Mahindra Bank (34.3%) and NMDC
(34.1%) have the highest tax rates.
Companies with huge deferred tax liabilities are beneficiaries
with falling corporate tax rates and vice versa:
The proposed
reduction in corporate tax rate will also have an impact on
companies’ deferred tax calculations, thus effecting profitability.
Companies with high deferred tax liabilities (DTL) on their balance
sheet will be positively impacted and vice versa. However, this is
expected to not have any impact on a company’s cash flow. Our
analysis suggests that Jindal Steel and Ultratech Cement will see
their profitability increasing by 4.2% each on account of huge net
DTL on their balance sheets, while BHEL will see its profitability
decrease by 2% and IDFC by 1% on account of the net deferred
tax assets (DTA) on their balance sheet.
Companies with huge MAT credit entitlement might be
negatively impacted:
The reduction in corporate tax rates will
also impact companies having a high amount of minimum
alternate tax (MAT) credit on their balance sheets. With corporate
tax rates reducing, a lower amount will be available for
adjustment against the existing MAT credit.
Effective tax rates in India have ranged from
19% to 24% over the past decade
Effective tax rate (%)
23.5
24.1
22.9 22.4 23.2
22.2
20.6
19.3
22.8
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Private companies pay an higher effective tax
rate than public companies
Sector
Public
Private
Total
Share in
Share in total tax
total
payable (%)
profits (%)
23.8
19.8
76.2
100.0
80.2
100.0
Effective
tax
rate (%)
19.3
24.4
23.2
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Ashish Gupta
(Ashish.Gupta@MotilalOswal.com); +91 22 3982 5544
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
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