India ETFs To Tap On Corporate Tax Cuts
Zacks Investment Research | Sep 20, 2019 08:00AM ET
India ETFs, which were under pressure over the past three months (as of Sep 19, 2019) mainly on a volatile global market backdrop, a rising U.S. dollar, slowing economic growth, irregular monsoon and highest surge in over five years . Bank stocks have been the major gainers.
Inside Corporate Tax Cut
India’s finance minister Nirmala Sitharaman announced a cut in the corporate tax rate from 30% to 22% (an effective tax rate of 25.17% inclusive of all cess and surcharges for domestic companies from earlier rate of 35%) in order to boost investment and growth .
Companies opting for the 22% income tax slab can pay income tax at a rate of 15% without any incentives, meaning an effective tax rate of 17.01%.
The tax level “moves India to parity with its regional peers thereby removing one of the issues related to manufacturing and exports,” per corporate heads and market watchers. The reduction to 22% in corporate taxes could provide India about $20 billion, which could be injected in the economy and “bring in real surplus to the corporates. Companies in Consumer Finance, banks both Pvt and Public sector, Hotels all pay upwards of 32% tax will have maximum benefits, however rest of the sectors will have nominal positive impact.”
India’s top 50 companies which form the benchmark NSE Nifty index paid a total tax of Rs 1.65 lakh crore for the year ended March 2019, while their net sales and net profit were Rs 50.55 lakh crore and Rs 3.60 lakh crore, respectively, according to Ace Equity. This showed corporates’ shrinking ability for further major investments (read: India ETFs to Get a Short-Term Boost: Here's Why ).
Other Tailwinds
Apart from the latest move, finance minister Nirmala Sitharaman “scrapped a tax on global funds, allowed concessions on vehicle purchases and hastened an infusion of an already announced 700 billion rupees ($9.8 billion) of capital in state banks.”
Apart from these efforts, India has been cutting interest rates drastically this year. On Aug 7, RBI slashed repo rate for the fourth time this year as benign inflation gave the central bank a leeway to resort to easy money policy to boost an economy that is Will Fourth Rate Cut in 2019 Help India ETFs Recover? ).
ETFs to Tap
Small-cap ETFs that are more closely tied to the domestic economy should gain more. iShares MSCI India Small-Cap ETF (LON:SMIN) and VanEck Vectors India Small-Cap Index ETF SCIF are such exmaples.
Large-cap ETFs like iShares India 50 ETF (JK:INDY) , iShares MSCI India ETF all Asia-Pacific (Emerging) ETFs here).
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