HUL To Set Up New Manufacturing Arm To Benefit From Lower Tax Rate
Hindustan Unilever Ltd. will incorporate a fresh subsidiary to set up manufacturing facilities as India’s largest consumer goods maker looks to take advantage of the lower tax rate on new manufacturing units.
The board of the maker of Lux soap approved setting up the fully owned arm with an authorised share capital of Rs 2,000 crore, according to its exchange filing. “This new subsidiary has been formed to leverage the growth opportunities in a fast-changing business environment and will help HUL in becoming more agile and customer-focused.”
Srinivas Phatak, chief financial officer at HUL, told BloombergQuint over the phone that the new unit will benefit from lower tax rates. “The Income Tax Act was amended sometime back and if you set up a new company for manufacturing purposes, this new company can come under corporate tax rate of 15 percent versus 22 percent in other cases, which therefore makes it more attractive.”
The company plans to invest Rs 500-800 crore in new manufacturing units in the first stage, he said.
In September, Finance Minister Nirmala Sitharaman cut the corporate tax rate on new units that start manufacturing by 2023 to 15 percent. The effective tax rate will be 17 percent, including surcharge and cess—down from 29.12 percent earlier. Such units won’t have to pay the minimum alternate tax. The relief came alongside the reduction in the headline corporate tax rate to 22 percent from 30 percent in an effort to boost private investments in a slowing economy.
Both Unilever and HUL are committed to invest in India as the nation’s market offers massive growth opportunities, Phatak said. Once the new company is incorporated, HUL will have a window (to commence production) till 2023, he said.
The consumer goods company shifted to the lower 22 percent tax rate soon after the September announcement. In an October post-earnings conference call with analysts, Phatak noted that the company’s effective tax rate was 30.5 percent in FY19, which would reduce to 27 percent on account of the lower tax rate in FY20. In FY21, the effective tax rate will be around 26 percent, he had said.