Another Friday. Another set of economic measures. Only this time, the decisions to slash corporate tax and withdraw enhanced surcharge infused ‘josh’ among equity investors. So much so that the Sensex logged the biggest intra-day gain in a decade.
The government today announced reduction in corporate tax rate from 30% to 22%. Including surcharge, the effective tax rate has been reduced from 34.9% to 25.2%. A special 17% rate for new companies starting new manufacturing facilities from October 2019 has also been created.
Companies have the option to go for a lower rate or stick to the current rate of 30% if they want to continue to claim exemptions under the Income Tax Act and can move to the lower rate once the exemptions expire. The minimum alternate tax rate has been slashed from 18.5% to 15%.
Moreover, government announced that the enhanced surcharge introduced in July 2019 Budget should not apply to capital gains on sale of equity share, which is subject to Securities Transactions Tax (STT).
Sonam H Udasi, Senior Fund Manager, Tata MF said, “Among the primary reasons for the broad-based weakness in the equity markets was the perception that the government does not value risk capital. With today’s announcement, they have signalled that they appreciate risk capital. You are missing the point if you look at it as a short-term measure. Since such measures appreciate risk capital, it will go a long way in improving the equity culture in India. The equity culture has come a long way and such steps will take it further and benefit mutual funds ultimately.”
The mutual fund has seen considerable flows into equity funds, even as broader equity markets took a beating during July and August. In August, inflows to equity funds stood at Rs.9,090 crore marking an increase for the fifth consecutive month. With this, equity inflows have recorded an increase every month since April 2019.
Shibani Kurian, Head of Equity Research, Kotak AMC said, “These steps taken on the fiscal side along with the steps taken by RBI in lowering policy rates and infusing liquidity into the system would be go a long way in terms of helping the economy and the capital markets get back on track and boost consumer sentiment and outlook.”
Impact on debt funds
Today’s measures, however, are not likely to augur well for duration funds. This decision has sparked fears that the government will breach its fiscal deficit target and that has driven yields on long-term bonds higher.
The 10-year G-Sec saw an intraday sell-off of 35 basis points. Corporate bonds across the curve saw similar moves.
Experts suggested that this might not be the ideal time to enter duration funds such as long-term bond funds or dynamic bond funds.
Arvind Chari, Head – Fixed Income & Alternatives, Quantum Mutual Fund said, “I have been saying this for a while now. The best time for duration funds is behind us. Even as the RBI is likely to cut the repo rate in its next monetary policy meeting, it is unlikely that yields on long-term bond yields will come down sharply.”
He added that money market funds will be the least affected following these measures.
Axis MF said in a note that the jump in yields on the benchmark 10 year to an intraday high of 6.88% is “still materially lower” than the 8% levels in September 2018.
“1-3 year corporate bonds continue to trade at 200+ bps above operative rates. Investors who understand credit risk and are ok with some short term volatility should invest in highly diversified largely AA oriented credit funds as we see AA spreads widening over the AAA curve making them attractive bets from a risk reward perspective,” Axis MF noted.
