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Reduced corporate tax rates likely to bode well for consumer goods firms

According to experts, partial cuts in pricing and gradual increase in ad spends could be in the offing (Mint file)Premium
According to experts, partial cuts in pricing and gradual increase in ad spends could be in the offing (Mint file)

  • The government slashed the basic corporate tax rate to 22% from 30% benefitting companies, while for new manufacturing companies it has been cut down to 15% from 25%
  • The move is likely to help FMCG and retail companies take steps to revive demand on the back of lower taxes

New Delhi: It could finally be a good Diwali for consumer goods firms.

In a big relief for corporates in India, the finance minister on Friday announced a reduction in corporate tax rates, a move that could bode well for consumer goods companies that have been struggling with a slump in rural and urban demand. Companies could increase promotions, take price-cuts, and ramp-up marketing spends to stimulate demand ahead of the festive season, said analysts who track the market.

On Friday, the government slashed basic corporate tax rate to 22% from 30% benefitting companies, while for new manufacturing companies it has been cut down to 15% from 25%, finance minister Nirmala Sitharaman announced on Friday, amid other measures that saw the Sensex soar. The relief measures announced today will cost the government 1.45 lakh crore per year.

The move could help FMCG and retail companies take steps to revive demand on the back of lower taxes, according to analysts.

“In our view, consumer companies are likely to partially cut prices. Thus optically demand can spur against current estimates. When GST rate cut happened in consumer goods, there was demand spurt that happened. While the environment is different now vis a vis then, but this notional saving or propensity to spur demand for consumer goods is likely," said Abneesh Roy, research analyst, and executive VP, Institutional Equities, Edelweiss Securities Limited.

He added that partial cuts in pricing and gradual increase in ad spends could be in the offing. This will benefit companies in retail, FMCG, and media sectors.

FMCG companies have been struggling with softening of demand in daily staples and discretionary items as consumers have been going easy on shopping.

As a result, they have been hoping for a stimulus from the government that will help infuse liquidity in the market and measures that will reduce the tax burden on consumers as well as companies.

Mayank Shah, category head at biscuit maker Parle Products said the move will help companies ramp up promotions on account of lower tax burden.“I think this will impact the economy in two ways; it will help revive demand because given the competitive context ie an ongoing slump in demand companies won't want to retain the profits, they now have the ammunition to probably go out and ensure they are competitive, price their products right, and give more promotions. This will in turn boost demand, especially ahead of the festive season."

He added that the move will improve profits for companies, and companies could, in turn, expand manufacturing capacity. Biscuit makers have been seeking lowered tax rates on widely consumed mass biscuits priced below 100 a kilo. However, Friday’s announcement did not address these concerns; Shah said that lowered cooperate taxes “would definitely give some sort of cushion but it will probably not work the way a rationalisation in GST rate would have worked."

However, Shah did not indicate any price cuts from the company's portfolio of biscuits brand but said the company could look at ramping up promotions.

The move will also boost corporate earnings, others said.

In an interview with CNBC-TV18 on Friday, jewellery and watchmaker Titan Company’s, chief financial officer, S Subramaniam said the move will boost earnings for the retailer.

“The cut in tax will go to the earnings straight away and we will be able to save 4% by rate cuts. Today’s big move will also boost earnings," he said.

Over the last few weeks, the government has been on an overdrive to infuse liquidity in the market and revive demand. On Friday evening, the finance minister asked scheduled commercial banks and non-bank financial companies (NBFCs) to reach out to customers in 400 districts to shore up credit disbursement across the country.

These collective measures are aimed at reviving a slump in domestic demand and stimulate manufacturing activity.

ABOUT THE AUTHOR

Suneera Tandon

Suneera Tandon is a New Delhi based reporter covering consumer goods for Mint. Suneera reports on fast moving consumer goods makers, retailers as well as other consumer-facing businesses such as restaurants and malls. She is deeply interested in what consumers across urban and rural India buy, wear and eat. Suneera holds a masters degree in English Literature from the University of Delhi.
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