As per the changes announced in the Income Tax Act, 1961, domestic companies have the option to pay corporation tax
at a reduced effective rate of 25.17 per cent. This is conditional upon their relinquishing other exemptions, such as a set-off of Minimum Alternate Tax credits and incentives under special economic and tax-free zones. And once exercised, the option is irreversible.
A third of the companies surveyed from capex-heavy sectors such as power and oil & gas have expressed a desire to continue with the current tax regime. However, a majority from sectors such as automobiles, chemicals, textiles, gems and jewellery, and retail are likely to shift immediately.
Subodh Rai, Senior Director and Head, Analytics, Crisil Ratings, said companies shifting to the new regime are likely to see close to 700 bps of tax savings. While this may not kickstart the much-delayed private investments cycle, it could help ease funding constraints of companies to some extent.
About half the companies surveyed said they will use the savings for ongoing capex, reduce debt or retain cash, which would strengthen balance sheets and prime them for fresh capex once demand improves.
Around 37 per cent of the companies surveyed are yet to decide on utilisation of tax savings though option to increase dividends found least preference. And just 10 per cent said they will pass on the benefit through higher discounts and sales promotion—indicating the tax cut alone may not seed demand growth.
Overall, the tax cut provides much-needed impetus to companies to press the capex button once demand stages a comeback. India Inc’s credit outlook remains contingent upon this pick-up in demand.