Nirmala Sitharaman's tax sops unleashes bulls on Capital and Currency markets

Last Updated: Fri, Sep 20, 2019 13:49 hrs
Bull Sculpture (Image Courtesy: Bloomberg)

Indian capital markets on Friday have made a huge gain post Finance Minister Nirmala Sitharaman's major tax announcements.

The Finance Minister announced slashing of corporate tax for local and domestic manufacturing companies.

The thirty scrip sensitive BSE Sensex dashed off to a 5.07 percent or 1837.62 point intra-day gain at 13:25 hrs on Friday. At 11:20 am, Sensex was up 1231.23 points to 37,324.70, while the National Stock Exchange (NSE) Nifty index was trading at 260.70 points higher at 10,965.50.

Gainers on the Sensex included HDFC, Maruti, Tata Steel, IndusInd Bank. Other gainers included Eicher Motors, Britannia as well. Stocks of Zee Entertainment were reportedly trailing by 10.26 percent following reports that its promoter had been restricted from selling a stake in the media company.

All sectoral indices except for media were in the green at the NSE, Nifty Bank jumped by 2.86 per cent while auto by 2.74 per cent higher. Metal and Pharma sector also rose by 1.54 per cent and 0.94 per cent respectively.

The Nifty50 on the National Stock Exchange also crossed the 11,000 mark.

An official press note on Friday said: "In order to promote growth and investment, a new provision has been inserted in the Income Tax Act with effect from FY 2019-20 which allows any domestic company an option to pay income tax at the rate of 22 per cent subject to condition that they will not avail any exemption or incentive."

The effective tax rate for these companies shall be 25.17 per cent inclusive of surcharge and cess. Also, such companies would not be required to pay Minimum Alternate Tax.

Further, the government added a new provision in the Income Tax Act with effect from 2019-20 which allows any new domestic company incorporated on or after October 1, 2019 making fresh investment in manufacturing, an option to pay income tax at the rate of 15 per cent.

Mustafa Nadeem, CEO at Epic Research suggested that the markets totally took the Finance Minister's reforms as something that have turned the table for medium to long term. "Today's reaction is totally out of surprise and it will be acting as strong support for the coming weeks and months. 10700 - 10800 is now set to be a strong base for Nifty and we may see continuity in positive momentum on any dips from here on," he added.

Explaining the impact of the fiscal reforms, Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities said in a note, "The announcements are definitely a positive move. It is also a prudent move to reduce the corporate tax rates because..."
"(1) it increases the retained earnings of the companies and forms the investible surplus for future.
(2) It moves India to parity with its regional peers thereby removing one of the issues related to manufacturing and exports.
(3) It maintains macro prudence by continuing to favour investment cycle rather than consumption cycle."

"On the flip side it will negatively impact the bond market as the revenue forgone due to the tax rate reduction will make it difficult to stick to the gfd/gdp budgeted target."

Besides stocks, the tax revisions also helped the Rupee make a strong gain in currency markets. Rahul Gupta, Currency Research Head, Emkay Global Financial Services explained in a note, "The news of government lowering corporate tax has rejoiced the market, stocks rallied sharply with bank nifty posting its biggest single day gain in 10 years. This gave rupee a big boost and USD/INR spot dropped to 70.67."

"The move was imperative as we are in a low demand cycle amid global idiosyncrasies. RBI has been providing support to the economy by reducing interest rates since 2019 however economy needed some boost from the fiscal front as well. Meanwhile, the bond market did not take the fiscal announcement very well. Also, FM was unable to justify the fiscal concerns, thus the 10 year yield surged nearly 25 bps keeping rupee gains under check. Thus, unless USD/INR spot doesn’t end below 70.80, we expect prices to bounce 71.50 in next week," he explained further.

With additional inputs from Agencies