Monday’s announcement of the new Direct Taxes Code (DTC) proposals is among the two far-reaching reforms that will help India sustain high growth rates.  For the capital markets, the Bill is positive, says Rakesh Arora, associate director, Macquarie Research. “Lower tax liability for companies at about 10 per cent and no changes in capital gains tax for foreign institutional investors (FIIs) are beneficial for the capital markets and ensure greater investor interest.”

On the flip side, the increase in MAT (minimum alternate tax) rate will translate into a higher tax outgo, even as the period for carry forward excess MAT amount over actual tax is extended from 10 years to 15 years.

We spoke to experts and analysts to figure out the implications of the changes in corporate tax and MAT on companies and sectors.

While these proposals will take effect from April 2012, read on to know what the initial estimates indicate in terms of impact on listed players:

MAT effect

The first draft of DTC proposed MAT to be levied at two per cent on gross assets.

Uday Ved, head of tax, KPMG, suggests the move to increase MAT by 200 basis points from 18 per cent to 20 per cent (on book profit) is less severe. After the proposed removal of surcharge and cess, effective rate remains almost unchanged. Nevertheless, quite a few companies could be impacted, including telecom, oil & gas and FMCG, as well as exporters.

The impact of MAT would also be negative for companies that have asset-owned business models, like road project companies. Most companies have special purpose vehicles (SPVs) and typically hold assets in the form of build-operate-transfer (BOT) and other projects.

Real estate companies, especially the ones in the commercial space, would also be impacted. Companies that have higher exposure that have higher exposure to SEZs (special economic zones), would be impacted as these are exempt currently. However, units in SEZs that commence operations on or before March 31, 2014 are to be entitled to profit-linked tax deductions.

On the face of it, increase in MAT rates is negative for IT (information technology) companies, which currently have significantly lower tax outgo. TCS, Wipro and HCL Technologies are among the major companies that are likely to see an increase in tax outgo. However, some clarity is needed on whether MAT would be applicable on STPI (Software Technology Parks of India) for 2012. Experts suggest mid-cap IT companies would be impacted more, compared to larger ones.

The same is true for pharma companies.

Sarabjit Kour Nangra, vice-president (research), Angel Securities, says: “Mid-cap companies in the pharma space falling in the MAT bracket will be more affected compared to larger peers”. Pharma companies that initially moved to SEZs to claim tax benefits would now attract MAT and this will be across the spectrum.

FMCG companies like Britannia and Colgate (which draws around 70 per cent of its output from tax-free zones) could see their tax outflows increase. Shirish Pardeshi, analyst, Anand Rathi Securities, says: “Initial estimates suggest FMCG companies operating in tax-free zones could see their effective tax rate increase by about 200-300 basis points on an average”.

Lower corporate tax a positive

Unlike MAT recommendations, which are better than in the original draft, corporate tax payers will be disappointed. Corporate tax rate has been proposed at 30 per cent instead of the earlier expected rate of 25 per cent; nevertheless it’s still lower than the highest rate of 33.6 per cent. Thus, lowering of rates would lead to better corporate profitability. Companies would take heart from the fact that tax rates would not carry any additional surcharge and cess.

Sandeep Gupta, analyst, Edelweiss Securities, points out: “Lowering of the corporate tax rate will lead to significant reversal of deferral tax liabilities/assets, which will impact 2010-11 profitability. With reduction in the statutory rate by 3.22 percentage points, there will be significant write backs/offs of deferred tax liabilities/assets, carried in the balance sheet.” Companies like Gujarat NRE Coke, Hindustan would stand to benefit on this count, he adds.

Key segments that will gain from the reduction in corporate tax include infrastructure construction companies like Lanco Infratech, BGR Energy, HCC and IVRCL Infra, which currently pay tax at 32-33 per cent.

State-owned banks like SBI and PNB also stand to gain. Likewise, many MNCs, too, are expected to gain as they typically pay higher tax rates, Siemens being a case in point.

“Broadly, the DTC proposals should lead to productive use of capital in the long-run. But, there could be a slowdown in investments by corporates in the near term (till clarity emerges on medium term availability of exemptions/incentives – especially as the MAT rate is sought to be hiked) and hence could impact GDP growth to an extent,” Says Deepak Jasani, Head of Retail Research, HDFC Securities

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