Corporate tax cut to boost manufacturing; unutilised capacity a concern

Slashing the corporation tax rate to 22 per cent and offering even lower rate of 15 per cent to manufacturers, which register from October 1, are likely to bring new investments into the country’s manufacturing sector.

Industry stakeholders said the lower tax payable would now mean more liquidity in the books of companies, which should reflect in higher investment.  Moreover, attracting foreign direct investment (FDIs) in manufacturing will become  easier now.

Electronic manufacturers like Whirlpool India, Jaina Group and Super Plastronics (SPPL) see the tax cuts as beneficial.  While Whirlpool has planned to invest Rs 590 crore over the next four years, SPPL has a Rs 150-crore budget for capital expenditure. Firms like Foxconn and Wistron, which have already got in-principal approval for FDI, may now avail the benefit of lower tax rates.

Together, these two have got a nod for Rs 7,600 crore of investment. Firms that have already got approval but are yet to set up plant or recruit staff will also benefit, said Vikas Vasal, partner & national leader on tax, Grant Thornton India. 

“Already, many global investors have started expressing interest, after hearing the 15 per cent tax rate figure, which is lower than any other major country. We hope that in the next one year, FDI inflow will surge,” he said.

Underutilised capacities, however, are cause for concern across sectors. Existing players will wait longer before making any fresh capacity addition. 

“Nobody will take an overnight decision. This will be more of an ingredient that will help the investment climate. Capital goods will have to wait as the segment has under-utilised capacity,” said M S Unnikrishan, managing director (MD) and chief executive officer (CEO) of Thermax.  Industry officials peg capacity utilisation for the capital goods sector in the range of 50 per cent to 60 per cent, which is lower than 70 per cent to 80 per cent a year back. 

Shankar Raman, wholetime director and chief financial officer (CFO), Larsen & Toubro (L&T), said: “It is a welcome move and shows that the government is alive to the industry’s requirement for reviving economic growth.”  Raman added that concerns on availability of debt-based funding also needs to be addressed. 

“Having more funds to invest is an important part of the equation. The ability of corporates to access debt at a competitive price is the other part that all concerned need to work on,” he said.  

Overall, the announcement is expected to gradually push companies to consider fresh investments. Unnikrishnan added: “When the government has straight away given a concession of a substantial nature, money is going to be available to the balance sheet.  The cumulative impact of this would be that there will be a positive impact on the private investment climate.”

Mahendra Singhi, MD and CEO of Dalmia Cement, said: “It has created a positive atmosphere and people will definitely start thinking about it.” 

The effective corporate tax rate for existing firms now stands at 25.17 per cent and at 17.01 per cent for new manufacturing firms after factoring in duties & surcharges. 

Moreover, they will now be exempted from paying minimum alternate tax (MAT).

Real estate companies like Signature Global, Omaxe, Mahagun and Paramount Group said as developers were struggling with fund crunch, lower tax outgo will provide liquidity to them.

JK Paper has plans to invest Rs 1,750 crore in its manufacturing unit, which now may avail the benefits of lower rate.

According to Neeru Ahuja, partner, Deloitte, effective corporate tax rate of about 35 per cent coupled with dividend distribution tax rate of about 20 per cent was becoming uncompetitive as return on investment was low.

Though very few major steel players are planning any fresh investment, new units would require to be separately registered for availing the concession rate of 17 per cent. 

“I think it is a good move which addresses the cost of doing business in India. It is a positive for companies operating in India and foreign investors thinking of India as an investment destination. However, the challenge for the government is to find alternate revenue streams to support the infrastructure expenditure being planned,” said TV Narendran, CEO and MD, Tata Steel.

Tata Steel plans to ramp up both Bhushan Steel as well as Usha Martin, which it has acquired via the NCLT route. It is expanding the Kalinganagar plant. 

However, the company had recently lowered its capex plans of Rs 12,000 crore to Rs 8,000 crore which included both India and Europe operations on the back of weak economic demand. 

Meanwhile, Jayant Acharya, director commercial, JSW Steel, said the lower corporate tax would improve margins and encourage overseas investment. This is because a message is being sent that India is making its corporate tax law in line with the global market. 

“I see two major benefits for the manufacturing sector. It will attract new investments from domestic players as margins will improve. This will encourage ploughing of more money into new investment. Also, it will change the sentiment which is very important in today’s business environment.”

JSW Steel would explore better investment opportunities, he added. The company has plans to increase its capacity by 40 per cent from 18 million tonne to 25 million soon. It plans to further scale it up to 45 million by 2030.

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