Mumbai, 20 September 2019: Diwali celebrations began at the Indian bourse almost a month ahead of the scheduled festival as the Central government doled out several concessions in the form of a severe tax rate cut in tax for the corporate sector as well as for the institutional investors.
It was a Fantastic Friday for the Dalal Street investors as market capitalisation of the BSE-listed firms zoomed by Rs 6.82 lakh crore after Finance Minister (FM) Nirmala Sitharaman announced a tax cut for corporate India to put on a fast track the slowing Indian economy. The m-cap of BSE-listed firms jumped to Rs 145.36 lakh crore from Rs 138.54 lakh crore.
In a major booster dose, the FM announced slashing of effective corporate tax to 25.17 per cent, inclusive of all cess and surcharges for domestic companies.
Before closing 5.32 per cent up at 38,014, the benchmark BSE Sensex registered its biggest ever intraday gain of 2,284.55 points. At close, the 50-share Nifty surged 569.40 points, or 5.32 per cent, to 11,274.20.
Market experts believe the announcement will re-start aiding foreign inflows into the country. Ajay Bodke, CEO PMS, Prabhudas Lilladher, said, “ The government has rolled out a red carpet that would ensure hundreds of billions of dollars of FDI and FII flows over the medium term. Equity markets would rejoice as the multi-year cycle of earnings downgrade will finally come to an end. It is in a true sense an early arrival of festival of lights (Diwali) and banishment of long period of darkness and gloom bothering the Indian economy."
Barring power and IT counters, other stocks in the Sensex pack ended in the green with Hero Moto Corp gaining the most at 12.52 per cent, Maruti Suzuki up 10.39 per cent, Indus Ind Bank gained 10.71 per cent, Bajaj Finance and State Bank of India gained 10-11 per cent.
“With positive trigger for higher earnings and change in prevailing pessimistic mood, it is imperative for investors to keep the faith and keep investing in companies with sound fundamentals and robust earnings growth, rather than getting carried away and buying duds,” said Devang Mehta, Head-Equity Advisory, Centrum Wealth Management.
The effective tax after surcharges and cess will come down from ~33 per cent to 25.17 per cent. Companies which want to avail of the lower tax rate will have to forgo exemptions.
There is a big boost for companies going for fresh capex and make in India as tax rates will be just 15 per cent for companies making fresh investment and incorporated after October 1, 2019.
Large Individual investors will be exempt from enhanced surcharge on capital gains from sale of equity shares. Also FPIs have been exempted from the enhanced surcharge.
Companies who had announced buy back before Union Budget (July 5 ‘19) will be exempt from enhanced surcharge.
Also, the companies have now been permitted to use their 2 percent CSR spend on incubation, IITs, NITs, and national laboratories.
Rusmik Oza, Head of Fundamental Research, Kotak Securities, said, “A fiscal stimulus of Rs.1.45 lakh crore has finally come to cheer the markets and the economy. It is a big boost to honest tax-paying companies who were paying full tax rate.
Oza said, “The effective tax rate of Nifty companies on an aggregate basis was 26 per cent which will now come down to 25.17 per cent. There are only 20 Nifty companies which paid more than 30 per cent effective tax rate and accounted for 43 per cent of overall net profit in FY19. Any company paying 33 per cent tax rate will see its earning go up by 12 per cent. Overall, we can see Nifty earnings going up by ~5-6 per cent in FY20 as the effective tax rate was already lower at 26 per cent. Add the sentiment booster angle and the way this will be taken positively by FIIs and local investors we can expect the Nifty to rally by 9-10 per cent from today’s low of ~10,700. Hence, 11,500-11,600 is very much possible on the Nifty without considering any other factor. FIIs will take the announcement very positively and flows will drive the market going forward. Companies paying more than 30 per cent effective tax rate will see upside of anywhere between 12-20 per cent based on the changes in earnings estimate.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, stated, “The Government’s announcement today is definitely a positive move. It is also a prudent move to reduce the corporate tax rates because it increases the retained earnings of the companies and forms the investible surplus for future, moves India to parity with its regional peers thereby removing one of the issues related to manufacturing and exports, it maintains macro prudence by continuing to favour investment cycle rather than consumption cycle. On the flip side it will negatively impact the bond market as the revenue forgone due to the tax rate reduction will make it difficult to stick to the gross fiscal deficit/gross domestic product budgeted target.
VK Vijayakumar Chief Investment Strategist, Geojit Financial Services said, “The measures announced by the FM can be described as a 'New Deal' for the Indian economy. The psychological stimulus from this 'New Deal' will be higher than the fiscal stimulus. Animal spirits will respond positively. The message from Dalal street is a clear signal. A Bold move indeed!”
S Ranganathan, Head of Research, LKP Securities said, "FM delivered the right recipe to cheer Corporate India and leverage the ongoing trade war to our advantage. The bulls are back and the sheer velocity of the rally signifies the extent of pessimism that has been prevailing in our markets".
Deepthi Mathew, Economist, Geojit Financial Services said, "Of all the announcements made by the Finance Minister in the last few weeks, today’s announcement lifted the spirit of the market. Slashing the corporate tax rate was a long pending demand from the corporate sector. The move would help in improving the investment climate of India. The total revenue foregone is expected to be Rs 1.45 lakh crore. Considering the present slowdown, chances are high that the government might miss the fiscal deficit target for FY20. However, in the long run, this move will benefit the fiscal."