What India Inc. Saved After Opting For Lower Tax Rates

More than half of the companies in the benchmark Nifty 50 Index have switched to lower tax rates, saving nearly Rs 4,323 crore in the six months ended September.Finance Minister Nirmala Sitharaman on Sept. 20 announced a cut in the headline corporate tax rate from 30 to 22 percent to shore up the economy battling its worst slowdown in six years. While analysts said actual benefits through private investments will show up in a few years, the move aided the net profit of Indian companies that opted for the lower rates.According to the government’s ordinance, companies can choose to pay the reduced tax rate by giving up exemptions or allowances; or continue with the older rate structure if they want to claim these benefits.Twenty-seven of the 50 index constituents moved to a lower rate of tax, according to BloombergQuint’s analysis based on quarterly filings. Twenty-three opted to continue with the older structure, primarily to exhaust the minimum alternate tax credits.For the 27 that opted for the new rates, a reduced tax outgo made up for the decline in profitability. While their profit before tax fell 12.4 percent year-on-year in the first half ended September, profit after tax rose.That’s because their total tax expense declined 23.4 percent year-on-year to Rs 30,283 crore..Their combined tax expense accounted for 26 percent of the profit before tax compared with 30 percent a year earlier. Had this proportion remained unchanged, the tax outgo would have been higher by Rs 4,323 crore.So, tax cuts helped these 27 companies save Rs 4,323 crore..Some of the companies that moved to lower rates recorded a one-time impact on account of changes in deferred tax.For instance:Axis Bank reported a net loss of Rs 112 crore despite a profit before tax in the quarter ended September on account of the deferred tax asset adjustment of Rs 2,138 crore.Similarly, a deferred tax adjustment of Rs 3,020 crore brought ICICI Bank’s second-quarter net profit down to Rs 665 crore.Conversely, Tata Steel reported a profit of Rs 4,145 crore on account of a deferred tax adjustment of Rs 4,233 crore.While some companies gained from the deferred tax adjustment, others suffered. That’s because it’s a future tax. Depending on whether it’s a write-back of excess tax already paid or a payment of tax saved now, it’s categorised as an asset or a liability. And it occurs because of the difference between the profit reported to exchanges and how it’s computed to pay tax.Companies follow the Indian Accounting Standards under the Companies Act to calculate profits for their quarterly and annual reporting. But they pay taxes under the Income Tax Act, which restricts the quantum of provisions a bank can set aside against bad loans, allows companies to set off losses against future profits while computing taxes and also provides for higher depreciation.When the profit under the Income Tax Act is higher than what’s calculated under the Companies Act, a deferred tax asset is created that can be used to lower future tax outgo. Conversely, if profit is lower under the Income Tax Act, the tax saved is carried forward as a liability to be paid in the future.The Finance Minister’s bonanza in September meant that companies moving to lower rates had to proportionally reduce their tax asset and liability.To reduce the deferred tax asset, a company would have to write off the excess amount from its profit. That impacted ICICI Bank Ltd., Axis Bank Ltd. and Yes Bank Ltd..By contrast, to lower deferred tax liability a company would have to write back some of the liability. Steelmakers, miners and telecom operators that are allowed to depreciate assets at a higher percentage under the income-tax law than under the Company’s Act had a higher deferred tax liability. Reversal of deferred tax liability led to a one-time gain for them..In the case of JSW Steel Ltd. and Vedanta Ltd., while the holding company continues to follow the old tax regime, some of their subsidiaries moved to lower tax structure. That resulted in a writeback of deferred tax liabilities..Waiting To Exhaust CreditsTwenty-three companies opted to continue with the older structure, primarily to exhaust the minimum alternate tax credits as these will lapse once they switch to the lower rates.State Bank of India, Indian Oil Corporation Ltd., Cipla Ltd., Bharat Petroleum Corporation Ltd., HCL Technologies Ltd., Adani Ports And Special Economic Zone Ltd., JSW Steel, and Hindalco Industries Ltd. cited unutilised tax credit as a reason for continuing with the older tax regime. While they didn’t specify the time they would need to shift to the lower tax rates, SBI and IOC said they would evaluate the options before the end of ongoing fiscal. Infosys Ltd. cited ‘tax holidays’ as a reason to continue under the old tax regime.GAIL (India) Ltd., UltraTech Cement Ltd., Grasim Industries Ltd., Coal India Ltd. and Mahindra & Mahindra Ltd. are evaluating options, according to their exchange filings.Other companies neither disclosed the reason for not moving to new rates nor gave a timeline.

What India Inc. Saved After Opting For Lower Tax Rates

How corporate tax rate cuts impacted India Inc...

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