Two out of three companies could immediately switch to new corporate tax rates: crisis

According to a Crisil Ratings survey of 850 large companies, two out of three companies could immediately switch to the new corporate tax regime. The cut in the corporate tax rate announced by the government is generating cautious optimism among businesses, he said.

“(There is) optimism as most businesses will benefit and intend to hold on to savings to ease funding constraints and strengthen balance sheets to be ready for further capital spending once demand revived. Capital costs given weak demand,” Crisil said in a statement.

These results are based on the responses received to a survey of 850 large companies (by turnover), whose debt instruments it notes. The sample includes listed and unlisted companies from all sectors.

In accordance with changes announced in the Income Tax Act of 1961, domestic corporations have the option of paying corporation tax at a reduced effective rate of 25.17%. This is conditional on their waiving other exemptions, such as an offset from alternative minimum tax credits and incentives under special economic zones and free zones. And once exercised, the option is irreversible.

A third of companies surveyed in sectors with high capital expenditure such as electricity and oil and gas expressed a desire to continue with the current tax regime. However, a majority of sectors such as automotive, chemicals, textiles, gemstones and jewelry and retail are likely to change immediately.

Subodh Rai, senior director and head of analytics at Crisil Ratings, said companies switching to the new regime should see almost 700 basis points in tax savings. While this will not reinvigorate the much-delayed private investment cycle, it could help ease corporate financing constraints to some extent.

About half of the companies surveyed said they would use the savings for ongoing investments, reduce debt or conserve cash, which would strengthen balance sheets and prepare them for new investments once demand improves.

About 37% of companies surveyed have not yet decided to use the tax savings, although the option of increasing dividends was the least preferred. And only 10% said they would pass on the benefits through deeper discounts and sales promotions, indicating that the tax cut alone could not fuel demand growth.

Overall, the tax cut gives businesses the much-needed impetus to press the capital spending button once demand returns. India Inc’s credit outlook remains dependent on this recovery in demand.

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