[ValarMorghulis]

Originally Posted by SmartCat

"Generating shareholder value" is euphemism for short-sighted decisions like -

This was one of the decisions due to which Dell went from a public company to a private one. Mr. Dell wasn't too enthused with the quarter on quarter decisions that the company had to take to make the shareholders happy.

[Samurai]

I saw this wonderful statement in a youtube comment section.

I’ve said for 20 years that no human needs more than $1 million per year. Everyone who has disagreed with me makes less than $1 million per year.

[V.Narayan]

This month's tax reforms. My take.

In the eyes of an investing businessman like me what the Govt has done is to take one big step forward towards making India at least one of the beneficiaries of the potential move of some manufacturing out of China. Given US politics this represents a permanent shift of direction - good for the world; good for the rest of Asia. In one swoop India has moved from having the highest corporate tax in the Asian economy to somewhere in the lower one-third from a tax rate percentage in the low thirties to the mid-twenties for large corporations. Many other steps are also needed - taxman's predictability of how tax rules are interpreted ie stop tax terrorism; Govt approvals for setting up a manufacturing unit are still too many and still suck; make the Green laws sensible and not open to interpretation by ignorant non-technical bureaucrats; and of course labour law reforms.

A structural change in the approach to corporate tax is what has happened reflecting also the Govt's (correct) understanding that when income is left in the hands of the income earner ie business or individual it gets more efficiently used than when taxed and put into the hands of any Govt. Not surprisingly many citizens are mixing this up with a knee jerk reaction, a Howdy Modi ploy or a justification for lower prices or why were individual tax rates not lowered etc etc.

The timing of this fundamental shift in tax philosophy is of course linked to the sentiment in the economy going down but above all else I believe it reflects seriousness on part of the Govt to boost manufacturing in India. Every company I am associated with is filled with active discussion on how can this opportunity be used (especially the reduction of Minimum Alternative Tax) to drive growth, expansion etc.

Also most of us citizens do not get to see the tussle between change driving politicians and bureaucrats reckon with from those who don't want the change and wish us back to 1974. From what I have seen a significant part of the bureaucracy is still caught up in Nehruvian socialist thinking and hate that each step of liberalization diminishes their petty power. To combat this those who believe in change use a external crises to drive home their agenda with suddenness.

The FM is taking a bet that over two years the increase in the economy, corporate profitability and tax compliance will help make up for this hamper and keep the fiscal deficit in control. I am no economist. As an individual tax payer I would have liked it if the marginal tax rate came down but there is only so much that any Govt can do given the complex balancing that is needed.

The next big move I expect is that of privatization of PSUs the real way. This Govt is pursuing an agenda of fundamental changes all knew were needed – GST, s.370, tax rates, changing the hackneyed dynamics with Pakistan among others. The ability and willingness to sell PSUs will not just reflect on the budget deficit a bigger signal will be that the political will has finally overcome (in this respect at least) the stranglehold of the old boys club of the IAS that have mastered the art of keeping not just lateral entries but other branches of the Govt from being in power. In my humble opinion the old boys club of the IAS needs to be diluted for the next phase of liberalization.

I am sure Samurai, Hayek, Sutripta, Ashokrajagopal, DigitalOne and others will have richer and more nuanced views on the recent tax reforms.

This is just the perspective of a businessman.

[carboy]

Originally Posted by V.Narayan

This month's tax reforms. My take.

Fully agree. This is the first reform I liked in 5.5 years.

Originally Posted by V.Narayan

The next big move I expect is that of privatization of PSUs the real way.

Privatisation is a distant dream. I would be happy with just disinvestment. In the last 5.5 years, the govt has actually increased their stake in PSUs & PSBs and also screwed the minority stockholders of PSUs in a big way.

[Samurai]

Frankly, I am not too focused on tax rates, never was. Once you start thinking tax as the cost of doing business, it won't matter.

There are people who only focus on cost cutting to improve margins. Such people may love tax cuts, again it is working at the margins. But real money comes from growing the business, by having demand.

Let's say you earn 10L, and spend 6L in expenses. The 4L profit will be taxed at 30%, leaving you 2.8L. The rate change from 30% to 22% will increase it to 3.12L. But there are too many variables in business that vary more wildly than the measly 8 percent.

For the same company, if the demand is good, it is possible to earn 30L while spending 12L. This can happen as the fixed cost is already taken care of and economy of scale kicks in. Now the 15L profit taxed at 30% or 22% leaves you with 10.5L or 11.7L.

Would you prefer 4L profit in 22% tax regime or 15L profit in 30% tax regime?

Basically it is about demand for your products and services. If the demand is good, corporate tax rates don't matter. If the demand is bad, the company will shutdown and corporate tax rates still won't matter.

I wish the government had done something to increase demand. Cutting indirect taxes (GST) would definitely improve demand. Cutting income tax wouldn't help since less than 2% pay income tax. They could also encourage sectors that will create new jobs, create new opportunities, etc.

[carboy]

Originally Posted by Samurai

Once you start thinking tax as the cost of doing business, it won't matter.

Most businesses think a lot about costs of doing business, reducing them & becoming more efficient.

Originally Posted by Samurai

Basically it is about demand for your products and services. If the demand is good, corporate tax rates don't matter. If the demand is bad, the company will shutdown and corporate tax rates still won't matter.

If taxes are lower, you can either reduce the prices to increase demand. Or if you have pricing power, then the tax cut will allow you spend more on capex without loans.

And taxes may mean the difference between life & death to a lot of businesses with low profits or no profits.

[Samurai]

Originally Posted by carboy

Most businesses think a lot about costs of doing business, reducing them & becoming more efficient.

They think a lot about real costs. In my industry, the payroll is the biggest cost and raises by around 10% every year. Taxes are a problem when you make profit.

Originally Posted by carboy

If taxes are lower, you can either reduce the prices to increase demand. Or if you have pricing power, then the tax cut will allow you spend more on capex without loans.

This is a gamble. Reducing price when no other cost has gone down, hoping you will make up the difference from reduced tax rate.

Originally Posted by carboy

And taxes may mean the difference between life & death to a lot of businesses with low profits or no profits.

How? If you don't make profit, you don't pay taxes at any rate. Why does it matter?

The shareholders care very much about corporate taxes. That is because the dividends are paid to the shareholders after corporate tax is deducted. Since it affects the shareholders, it affects the share prices. Reduced tax rates will boost the share prices. It also leaves more cash with the company (if they don't give dividends), which they may use to buyback shares and further boost the share prices. I don't see why they will use it to reduce price of the product or services. They may not increase price, that's about it.

[kiku007]

Originally Posted by Samurai

The shareholders care very much about corporate taxes. That is because the dividends are paid to the shareholders after corporate tax is deducted. Since it affects the shareholders, it affects the share prices. Reduced tax rates will boost the share prices. It also leaves more cash with the company (if they don't give dividends), which they may use to buyback shares and further boost the share prices. I don't see why they will use it to reduce price of the product or services. They may not increase price, that's about it.

Does this explain why the stock market responded positively?

Because, I couldn't understand how the corporate tax rate cut will help but the stock market's response was different.

Talking about disinvestment, why would anyone buy Air India?! Again, I don't understand.

[Samurai]

Originally Posted by kiku007

Does this explain why the stock market responded positively?

Because, I couldn't understand how the corporate tax rate cut will help but the stock market's response was different.

I don't closely follow the share market, since mine is a private company.

But yes, it affects the shareholders positively:
1) Less taxes means more dividend for shareholders.
2) Less taxes can also mean share buybacks, which increases share prices.

Listed companies like reduced taxes because it increases the market cap of the company, makes more cash available, etc. It doesn't reduce cost of product/services, so has no direct affect on demand.

Trump cut corporate tax from 35% to 21%, how did it help? He also reduced the demand for US goods by indulging in tariff war. It is the demand(lack of) that affected the US economy, negatively.

[saket77]

Originally Posted by Samurai

I don't closely follow the share market, since mine is a private company.

But yes, it affects the shareholders positively:
1) Less taxes means more dividend for shareholders.
2) Less taxes can also mean share buybacks, which increases share prices.

Yes, other than the above that you listed (which is more applicable to companies which have almost reached the top of maturity cycle); less taxes for growing/ new companies mean more cash in hands of company which can be used to fund growth, indulge in more CAPEX, etc. which in turn spurs stock price. Availability of more cash means lesser borrowing for the company which lowers the interest costs and this is mostly treated as a big advantage as you limit your fixed outgo of funds. Corporate has to pay the cost of debt even when in loss, so limiting the interest burden gives them a huge breathing space.

Originally Posted by Samurai

Listed companies like reduced taxes because it increases the market cap of the company, makes more cash available, etc. It doesn't reduce cost of product/services, so has no direct affect on demand.

True. Market cap increases indirectly because of the availability of cash and the subsequent possibilities discussed above as share prices increase.
Also agree that this corporate tax cut doesn't have a 'direct' effect on demand. The effects can only be seen in long term only as a cascading effect. This move looks more for helping the plunging stock markets and for helping the Corporate rather than to accelerate the economy as a whole.

[DigitalOne]

Originally Posted by saket77

Also agree that this corporate tax cut doesn't have a 'direct' effect on demand. The effects can only be seen in long term only as a cascading effect. This move looks more for helping the plunging stock markets and for helping the Corporate rather than to accelerate the economy as a whole.

Yes, agreed. This was one of the many steps to be undertaken to accelerate the economy.

RBI has been reducing the interest rate for an year now to kick-start demand. Indirect taxes are at historical lows (multiple statements made by Kerala Finance Minister Thomas Isaac) compared to pre-GST. And government seems serious on PSU privatization now.

So multiple steps being undertaken; so hopefully it will work out sooner. Fingers crossed.

[ashokrajagopal]

My take on these is very convoluted.

1. With respect to GST, this was supposed to be a losing game anyway, at least in the short term. The whole idea was that sales tax, excise, and VAT was all accounting to roughly 31% and GST's largest slab is 28%. Even if all the items were taxed at 28%, GST would have brought in a tax shortfall for the first few (if you know India, for about 7-8 ) years. To add to this, the complications in GST rollout and the multiple slabs. The simplification of tax thing is supposed to generate long term boost for business with short term shortage of revenue for the government. This is a parliament decision to go in that direction to trade off short term revenue with hope for future. But wishful thinking otherwise is not really going to make any difference.

2. The slowdown in the economy, which seemed to suddenly come up now and which was totally invisible to the country 6 months or a year ago is an intriguing fact to say the least. The economy in India is largely agriculture based or service based. The last 30 years had been good for some sections of the economy. The key point their is that a lot of weight that India pulls amongst international players is the size of the market. Even the top 10% of this country is as big as Vietnam. But has that sizeable market got saturated ? If yes, what we see here is a structural problem.

3. The corporate tax reduction can be done for a lot of objectives in a govt's mind. In my opinion, this is something that needs to be done when the country is growing okay, rather than when there is a slowdown in demand. Insofar as the government's revenue for expenditure is concerned, GST is supposed to bring down revenue, and we have the demand issue which further reduces the revenue. And we have the "iron rule" on deficit. I do not know how the government plans to cover this up by not expanding on deficit or by reducing spending. If the point in 2 is the reason we are facing a slowdown, cutting govt expenditure will just accelerate the slowdown.
We are living in interesting times when the budget speech was a speech alright, but there was a number problem which got pointed out. Lets set aside the fact that this was eerily equal to the amount pulled out from RBI reserves, but still the fact remains that with the demand slowdown in action, revenue is going to come down further. If the deficit is to be kept as it is, it just goes into the Austerity realm.

4. If corporate tax is kept as is, and MAT was brought down to force companies to give up on exemptions, and if the finance ministry could project on how that would save up the cost of bureaucracy and force companies to give up the hassles -- it would have made more sense. But it is a political decision, and this government has been pretty stern on political will. At the outset it does not trigger any economic activity as is, other than on the stock market.
A parallel I would draw is to how NHAI builds roads. If the price of land is high and the payment is fast enough, the roads will get built faster. The higher expenditure is on a projection that the economic activity there will bring in more revenue. If there are no solid projections on that, and just wishful thinking, it could go either way. What NHAI is facing in India is open to anybody's perception.

5. The low inflation, low interest rate regime that has worked well for some countries in the past may or may not work very well in India. The access to credit in itself does not trigger growth, except if the growth is an indirect result in covering a deficit, like infrastructure, or public health or food. If the 10% middle/upper class targetted high growth population is a saturated bunch, expect to see more downturns -- cars, two wheelers, gadgets, and real estate is going to stagnate for a long time.
The low inflation low interest regime also tend to favor the larger players, who take a leverage on volume. Example, if the low inflation regime prompts retail sellers to reduce margin ( strangely, we call this competitiveness) the largest retail sellers automatically benefit because they have larger volume and thereby larger revenue. This is how giants get created. Thats not a problem in itself, but if the giant is an international player, the growth in employment is never going to happen. Think of it like this, the low wage growth of the middle class is going to trigger their want of discounts, which help players like Amazon, but is going to kill off the little retail man powered space in our cities. If they have to survive, they keep taking hits on margins and this is bound to affect the demand lower down. Lower demand with low inflation further will stagnate salaries, which I think would reduce the want of credit. It can go into a vicious cycle if demand is not spurred.

A lot of you may think this is one type of doomsday prediction which professional pessimists do, and there is no need to worry. The answer to that is to remember the euphoria 6 months before, or a year before.
The rural sector is already in a doomsday, no two opinions on that.

[carboy]

Originally Posted by Samurai

This is a gamble. Reducing price when no other cost has gone down, hoping you will make up the difference from reduced tax rate.

No, it's a simple calculation. There is no hope involved.

Assume your company produces a widget.
Fixed costs per year for your company is A
Variable costs per unit is B
Current Selling Price per unit is C
Total number of units sold pre-tax cut is D
Current Tax Rate is 30%.
Now Tax Rate reduces to 25%.

To keep your current year profits, you need to reduce your selling price from C to (0.05A + 0.70DC + 0.05DB)/0.75D
If you do this, you will make the same PAT you made before the tax cut.

If you don't have any increase in sales because of the reduced price, you still don't lose anything. If you have an increase in sales, then your profit will be more than before.

Originally Posted by Samurai

How? If you don't make profit, you don't pay taxes at any rate. Why does it matter?

My bad. I should have written for companies making low profits. (not no profits). For companies with low profits, it may not make sense to continue with the business, if the ROI is too small. A tax cut increases the ROI & makes it worthwhile to continue the business.

Originally Posted by Samurai

The shareholders care very much about corporate taxes. That is because the dividends are paid to the shareholders after corporate tax is deducted. Since it affects the shareholders, it affects the share prices. Reduced tax rates will boost the share prices. It also leaves more cash with the company (if they don't give dividends), which they may use to buyback shares and further boost the share prices. I don't see why they will use it to reduce price of the product or services. They may not increase price, that's about it.

Very, very few companies distribute all their profits as dividends. Usually it's less than 40% of the profits and nearer to 20-25%. And a lot of companies just transfer to reserves or keep it in cash for capex.

So the money after dividends can be used for fresh capex which can be now done without additional debt (which would have risked the company).

[ashokrajagopal]

Originally Posted by carboy

No, it's a simple calculation. There is no hope involved.

Assume your company produces a widget.
Fixed costs per year for your company is A
Variable costs per unit is B
Current Selling Price per unit is C
Total number of units sold pre-tax cut is D
Current Tax Rate is 30%.
Now Tax Rate reduces to 25%.

To keep your current year profits, you need to reduce your selling price from C to (0.05A + 0.70DC + 0.05DB)/0.75D
If you do this, you will make the same PAT you made before the tax cut.

If you don't have any increase in sales because of the reduced price, you still don't lose anything. If you have an increase in sales, then your profit will be more than before.

Trying to understand the formula to see where hope is ruled out.
The only two possibilities are flat sales, or increase in sales ? What if the new "D" is half of old "D" ? A lack of demand may be defined anyway, but the technical term on that is reduction in sales.

[carboy]

Originally Posted by ashokrajagopal

Trying to understand the formula to see where hope is ruled out.

I don't understand the question. By "no hope involved" - I meant that there is no need to hope.

Originally Posted by ashokrajagopal

The only two possibilities are flat sales, or increase in sales ? What if the new "D" is half of old "D" ? A lack of demand may be defined anyway, but the technical term on that is reduction in sales.

Are you suggesting that sales reduced to half because the price was reduced?

The profits after decrease in prices & reduced sale and reduced tax will be the same as the profit you would have made at the old price, reduced sales & higher tax.