This post was first published on medium.com
There has been a lot of action in the market lately given the type of information that has been pouring in. While the world was still sinking in the news of Aramco being hit by drowns of Yemen Rebels and most of net oil importer nations looking at their reserves along with cursing themselves for not diversifying their oil import sources enough, there came another event where US FED decided to go for second Fed rate cut although not complying completely with Donald Trump recent request, but still something is better than nothing.
While most of the Indian viewers thought it’s time to turn to binge-watching “The Family Man” web series rather than listening to same economic slowdown hunches by experts, there came something extraordinary “corporate tax rate cut”. Let the magnitude of returns speak for themselves in the amazing visualization by Ankit Gupta .
Well if that captures your attention, then you must be looking to dig into the issue further. Let me help you with that without putting that Let Me Google That For You link.
Here is an abstract from The Economic Times:
“Diwali came early for India Inc and the bourses after the Centre slashed effective corporate tax to 25.17 percent, inclusive of all cess and surcharges, for domestic companies. Making the announcement, Finance Minister Nirmala Sitharaman said the new tax rate will be applicable from the current fiscal which began on April 1.”
That brings us to question of existing tax rate faced by the public companies currently. Here is sneak peek into top 10 companies in Indian equities space by market capitalization.
Most of these firms seem to face an effective tax rate of more than 25% and with the reduction in effective tax rate, these will have an increase in Net income given they continue to have same performance and leaving the corporations with higher share of profits that they are making which eventually flows into pockets of investors through increased cash flows projections deriving the intrinsic value of securities higher. Going by the numbers, the earnings per share for Nifty 50 in the coming years is estimated to grow at a rate of~18%. Maybe giving the people much needed reason to invest and revive investments. Some of it might flow in the form of higher appraisals for all of us and we all might be back in streets to buy those wishlist items that have been waiting in the carts for some time giving a positive momentum to the economic cycle.
Now with new corporate tax structure, India has become more competitive globally as our PM Modi pointed out during his US rally and might be a step towards realizing our $5 trillion economy goal.
As with most of the risk-return relations, upsides almost always comes with a potential risk. Here, the risk being the increasing government debt squeezing in the money from the ecosystem leaving lesser for the corporates. Currently, the fiscal deficit, which can be described as total money spent by the government over the total income earned, stands at 3.4% of the country’s GDP but if we include borrowings from all government entities like NHAI, FCI, the number shots up to 5.8% as pointed by finshots. On top of that, if additional revenue forgone by the government in terms of corporate tax rate cuts is included then this number shots up even further. Hopefully, Government might have it all figured out given its previous experiences with fiscal stimulus and growth revival. So maybe as done by most in bad times, we will have to keep the faith and keep going. Or do we have a choice? Happy to know your views on the same.
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