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Tax cut: Nifty earnings set to get a boost of 6-7%, say D-St experts

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Mumbai: Nifty earnings are likely to get a boost of up to 6-7 per cent after Finance Minister Nirmala Sitharaman proposed to slash corporate tax for domestic and new local manufacturing companies, say analysts.

Gautam Duggad, Head of Institutional Research at Motilal Oswal Financial Services expects Nifty earnings to rise 6-7 per cent over a 12-month basis.

“Low tax rate cut will help boost earnings and kick start consumption and investment cycle. High tax paying companies will benefit,” said Duggad.

FM said the effective rate will be 25.17 per cent for corporates, including surcharges and cess. The measures will be implemented through an ordinance, she said.

The FM said the new provision has been inserted into the Income-Tax Act with effect from fiscal year 2019-20 to promote growth. It will allow any domestic company to pay income-tax at 22 per cent subject to the condition that it will not avail any other incentive or exemptions.

The rate of Minimum Alternative Tax (MAT) has been reduced from 18.5 per cent to 15 per cent. The objective is to provide relief to companies that continue to avail exemptions and incentives, FM said.

Sunil Singhania, Founder of Abakkus Wealth Managers told ET Now that the initial beneficiaries would be companies which are paying full tax, and for them it would be a straight 10 per cent increase in profit.

“What it also does is that it increases earnings expectations and therefore the PE will start to look much more lower than what it is today, maybe a 5-6 per cent increase in overall earnings for Nifty because of the tax cut is definitely on the cards,” he said.

According to Rusmik Oza, Head of Fundamental Research at Kotak Securities, the effective tax rate of Nifty companies on an aggregate basis was 26 per cent which will now come down to 25.17 per cent.

Oza pointed that there are only 20 Nifty companies which paid more than 30 per cent effective tax rate and accounted for 43 per cent of overall net profit in FY19.

He said that any company paying 33 per cent tax rate will see its earnings go up by 12 per cent, and overall, we can see Nifty earnings going up by around 5-6 per cent in FY20 as the effective tax rate was already lower at 26 per cent.

Others analysts on Dalal Street also shared the view.

Sunil Tirumalai, Head of Research and Strategist at Emkay Global Financial Services, a first-cut analysis of Nifty stocks suggests about 20 stocks should see in excess of 10 per cent earnings upsides due to this announcement, while the Nifty as a whole should see approximately 8 per cent EPS benefit for FY21.

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