The Sensex rallied by nearly 2,000 points on Friday, as investors celebrated the announcement of a cut in corporation tax rates as also the removal of the enhanced surcharge on capital gains tax and the withdrawal of the tax on buybacks. However, bonds sold-off sharply with the 10-year benchmark yield rising 24 basis points to hit 6.877% during the day on fears the fiscal deficit would widen after the government cut the corporate tax rate. Investors were anxious the space for rate cuts by the central bank would be limited. The yield closed at 6.789%.
The lower effective tax rate of 25.17% is expected to boost corporate earnings; the earnings growth estimate for the Sensex has been revised upwards to 25% for 2019-20 from the earlier 13%. According to Axis MF, the impact on the earnings per share purely on account of the tax change could be around 7-10%, according to consensus estimates.
Companies are expected to resume buybacks now that the tax has been been withdrawn. The 20% tax on the buyback of shares, announced in the Union Budget 2019 had come as a dampner; it did away the tax arbitrage between dividend payout and buyback of shares. While the Sensex rallied 1,921.15 points or 5.32% to settle at 38,014.62 points, the broader Nifty50 gained 569.40 points to end at 11,274.20.
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The broad-based rally on Friday also saw investor wealth swell by Rs 6.83 lakh crore to Rs 145.37 lakh crore. The Bank Nifty advanced 2,223.90 points – its biggest single-day gains ever – to close the session at 28,981.55 points, up 8.3%.