Mumbai: The corporate tax cut will help India Inc save up to Rs 65,000 crore of outgo in FY20, but is unlikely to meet the aim of stimulating private-sector CAPEX in the medium-term, a report said on Tuesday.
Over a long-term horizon, the move to massively cut the corporate taxes by 10 percentage points to 25.17 per cent will push up CAPEX, India Ratings and Research said.
Top 1,000 listed entities will save up to Rs 65,000 crore from the tax cut measures in FY20, which will include Rs 9,000 crore savings to banks and Rs 6,000 crore to the struggling non-banks, it estimated.
The government announced the move last month with an eye to boost the sagging economic growth, which has slipped to a six-year-low for June. It sacrificed on revenues of Rs 1.45 lakh crore which would arise due to tax cut.
Amid a broad-based slowdown in demand, revenue visibility for new manufacturing units is likely to remain bleak, which is evident from a fall in corporate asset turnover ratio in FY19 across sectors, the agency said.
"The corporate tax rate cut by itself may be insufficient to meaningfully stimulate private sector CAPEX over the near to medium-term," it said.
In FY20, tax savings are likely to account for 2.5 per cent of the funds from operations (FFO) for highly leveraged sectors, and 4.5 per cent of the FFO for lower leveraged sectors, the report said.
"Therefore...the corporate tax cut is unlikely to directly impact the credit profiles," it added.
The internal rate of return expected from any new upcoming CAPEX is determined by both the likely asset turnover and cost structure of the business, it explained.
The tax savings would encourage corporates to go for significant CAPEX only if they are confident of registering a meaningful level of asset turnover over the medium to long term, it said.
The agency said the growth slowdown has been caused primarily by a slump in household demand, and a rise in private sector CAPEX or an increase in employee benefit expenses would be essential for stimulating broad-based private sector demand.
It said the delay in deleveraging of corporates coupled with the substantial spare capacity across sectors would hamper the ability of corporates to pass on the benefits of their tax savings to households through wages.
However, those with lesser loans might be able to pass on the benefit to households either via higher employee benefit expenses or dividend payouts, it said.
It was quick to add that these benefits may not be material, given the low free float in most sectors.
"Notwithstanding the limited short-term impact, the corporate tax rate cut is likely to stimulate CAPEX in the private sector over the long term," it said.
Besides improvement in ease of doing business, the rationalisation of direct taxes is likely to enhance the cost-competitiveness of domestic enterprises over the long term, it said.
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