India’s reduction in the corporate tax rate to among Asia’s lowest was welcomed by investors as a boon that may help spur economic growth and company profits.
The effective corporate tax rate for all domestic companies will be 25.2%, lowered from 30%, the government announced Friday. That reduces it to the same level as Singapore.
“This move means concerns on India are quite well covered for the time being,” said Felix Lam, Hong Kong-based senior Asia Pacific equities fund manager at BNP Paribas SA. “We have to now see what companies do in terms of investments and what consumers do in terms of spending.”
The benchmark Sensex Index headed for its biggest gain in a decade, climbing as much as 6.3% after the unexpected reduction. The gains wiped out a year-to-date loss that had triggered a so-called correction Thursday as the gauge registered a 10% drop from a record high touched in June. Foreign investors had sold $4.9 billion of local stocks this quarter through Sept. 18, which would be the biggest quarterly outflow since 1999.
“As well as providing instant EPS upgrades, these tax cuts should provide a boost to business confidence and investment and will create a tailwind for Indian equity performance for the remainder of the year,” said Ross Cameron, head of Northcape Capital Ltd.’s Japan office in Tokyo. “India remains the best long-term growth story in EM but the economy has clearly slowed recently.”
The tax cut, retrospective from April 1, will cost the government 1.45 trillion rupees ($20.5 billion) in revenue. It’s the latest in a series of measures rolled out in recent weeks aimed at boosting demand and investments after economic growth slowed to a six-year low in the April-June quarter.
“We already had quite a positive view on the country’s equities market so we will stay invested,” Lam said. “India now needs to create more jobs to make it further better.”
“Expect this rally to have more legs with follow through buying next week, especially after India’s under-performance and foreign outflows recently,” a Citigroup note said. “There are still several people out there worried about any negative fine print which could come later but this does look straight-forward and genuine.”
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