Nirmala Sitharaman has rolled out hefty corporate tax rate cuts to ease burden, but some consumer goods companies such as Dabur, Marico and Godrej are expected to continue with the current rate of 30%,
Finance Minister Nirmala Sitharaman has rolled out hefty corporate tax rate cuts to ease burden amid ongoing economic slowdown, but some consumer goods companies such as Dabur, Marico and Godrej are expected to continue with the current rate of 30%, opting out of the new regime. Dabur, Marico, and Godrej Consumer Products Limited will likely “continue to avail exemptions while staying at a marginal tax rate of 30%, given that their current effective tax rate is below 25.6%, anyway,” Kotak Institutional Equities said in a research note. However, this does not mean that these companies do not have the option of moving to the new marginal tax. Instead, they will choose to move at a later date when the tax exemptions start to expire and transition becomes a better choice, the report added.
Meanwhile, some of these FMCG and consumer packaged goods companies may also hold on to the benefits from the tax cuts and not pass on the same to customers, unlike what was widely expected. “While the majority of the benefits will be retained by the companies, a few price reductions here and there are expected as such moves do not likely dilute absolute operating profits,” the Kotak report said.
Major FMCG and consumer goods companies are experiencing waning demand due to several issues such as NBFC crisis, agrarian distress and unemployment. According to the Kotak report, companies are unlikely to bring about changes in the existing rate by lowering them and would rather use the money to fuel the company’s growth or drive premiumization. Prices of daily use items such as food, beverages, clothes, makeup, or tobacco are not likely to be brought down even though price cuts could have bolstered demand.
The BJP government had recently revised the corporate tax structure and brought it down to 22% and 25.6% marginal and effective tax rates on companies from 30% and 35%, respectively. However, the same comes with a condition that companies which want to be taxed at the new regime will have to let go off any exemption that they are currently provided.