Investors shift to domestic-focused firms as exporters to gain less from tax cut
BENGALURU: Infosys, Tata Consultancy Services (TCS) and HCL Technologies were among the rare set of stocks on the benchmark Nifty that lost on a day Indian equities logged their biggest gains, with investors buying into homefocused companies instead of exports-driven technology bellwethers after New Delhi announced cuts in corporate levies.
Benefits of the tax cuts, stretching to 10 percentage points, would be greater for companies that largely generate their revenue at home and don’t enjoy many operational exemptions. By contrast, many exports-driven companies have lower tax incidence due to exemptions, and stand to benefit less from the tax incentives announced on Friday.
TCS, Infosys and Tech Mahindra declined Friday, with investors trading three times more shares than they do on an average on anticipation the sector might not see an immediate impact of the corporate tax cuts. Wipro, which would benefit from the government’s move to not impose a buyback tax for transactions before July 5, was an exception. It climbed Rs 4.25, or 1.76%, on a day the Sensex soared a record 1921.15 points to close at 38,014.62 points.
“Near term, there are no benefits for these companies. At least for the very near term, the tax rates will remain broadly unchanged at TCS and Infosys (and others),” said Kuldeep Koul, lead analyst, ICICI Securities. “It will be after 18 to 24 months that they would consider tax rates without SEZ exemptions and migrate to the current structure.”
IT services companies should realise the benefits of 25.17% tax later as they continue to receive exemptions under the Special Economic Zone (SEZ) scheme now.
Among the top five technology services exporters, Wipro stands to benefit as the government said the tax on share buyback would not apply for plans announced before July 5.
In April, Wipro’s board announced a buyback of 32.30 crore shares for Rs 325 apiece, with a total commitment of ?10,500 crore, which closed in August.
“The company does not have to pay the anticipated tax of nearly Rs 2,100 crore for the recent buyback,” said Koul of ICICI Securities.
Another analyst said that money is moving into domestic bets from IT, and that has dragged the IT stocks down.
“Wipro is benefitting because it will not have to pay the buyback tax. But broadly, the IT sector had benefited because investors were buying into the stocks in the absence of other bets among the domestic-focused companies. Now with the FM’s announcement, some amount of money is moving back to domestic bets,” said a Mumbai-based analyst.
Wipro said the government’s announcements would bring back confidence in the market.
“The clarification on grandfathering of the buyback tax on inflight buyback programs is a comforting outcome. This would go a long way in restoring confidence in the market and nudge companies to make fresh investments,” said Jatin Dalal, chief financial officer, Wipro.
Industry body Nasscom welcomed the announcement as its member companies can now migrate to the new tax rate from SEZs eventually.
“While the SEZ sunset clause has not been extended, companies claiming tax holidays, whose effective tax rates (after claiming tax holidays) are higher than the peak 25.17% can now choose to give up the tax holiday and claim the new tax rate of 25.17%,” said Nasscom.
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