budget 2011-12 post budget analysis - devil lies in the expenditure
TRANSCRIPT
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Budget 2011-12Post Budget Analysis - Devil lies in the Expenditure
Emkay Research Team
28 February, 2011
Emkay Global Financial Services Ltd.
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Budget 2011-12 Highlights
Devil lies in the Expenditure
§ Key concern: Fiscal deficit target of 4.6% seems a challenge. Non-plan expenditure under the heads: subsidies,
social services, economic services and other non-plan capex significantly lower over FY11 RE – little optimistic
§ Direct tax: Tinkering of MAT rate from 18% to 18.5%; reduction of corporate surcharge from 7.5% to 5% and increasing the threshold limit for individual income tax from Rs160000 to Rs180000
§ No major changes in existing indirect tax structure. New goods and services brought under excise and service
tax net – hinting a move towards GST
§ No big bang announcement (like increase in FDI for multi brand retail, etc).
§ Positive moves: To improve foreign inflows in infrastructure sec tor by a) increasing the limit of infrastructure
bonds from US$5bn to US$25bn and b) allowing FIIs to invest in bonds of unlisted infra SPVs
§ Domestic mutual funds to accept equity subscription from foreign investors who meet KYC requirements
§ Five point strategy for curbing black money. Amnesty on card ?
§ Fertilizer sector given an infrastructure status - more investment to flow in.
§ The budget will have minimal impact on the market.
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Winners & Losers
Cummins India, Greaves Cotton, Punj Lloyd, Elecon Eng, McNally Bharat, TRF
L&T, BHEL, Thermax, Voltas, Blue StarEngineering & Capital Goods
GSFCChambal Fertilisers, Tata ChemicalsAgri-input & Chemicals
Ashok Leyland, Bajaj Auto, Hero Honda, M&M, Maruti, Tata Motors and TVS Motor
Automobile
Andhra bank, IOB, Union bank, UCO bank, PNB, BOB, Bank of Maharashtra, BOI, LIC Housing Finance, HDFC, ICICI Bank, SBI
Banking and Financial Services
Shree Cement, GrasimCement
Telecom
Power
Pharma
Paper
Oil & Gas
Metals
Media
IT
Infrastructure
FMCG
Sector
Godrej Consumer, Marico, TitanITC, Godfrey Philips, HUL
GMR Infrastructures, GVK Power & InfraIRB Infra, IL&FS Transportation, Ramky Infra, Era Infra
All Companies
All Companies
Sesa Goa, Sterlite IndustriesAll the steel companies, Hindustan Zinc MOIL, Hindustan copper, JSL Stainless
All Companies
BILTTNPL, JK Paper
Almost all domestic pharma companies operating in SEZ
Biocon/ Dishman
Adani PowerNTPC, Lanco Infra, Reliance Power, JSW Energy, Jaiprakash Power, Nava Bharat Ventures, KSK, GIPCL
Bharti, Idea, Rcom
NegativeNeutralPositive
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Tackling medium term concerns
Supply side constraints on agriculture
§ Target of 26% growth agriculture credit for banks to Rs4750bn
§ Giving cold storage and fertilisers, infrastructure status
§ Allocations of Rs3bn for improving productivity of crops which are largely imported like palm oil or volatile in prices like vegetables
§ Allocation of Rs3bn for improving productivity of fodder to control rising milk prices
Improve the Fx flows to tackle current account deficit
§ Limit on FII investments in infra bonds raised to USD25bn (from USD5bn), total corp bond limit at USD40bn now (from USD20bn)
§ FII can also invest in the bonds of unlisted infrastructure SPVs
§ Foreign investors other than those registered with SEBI or NRIs allowed to subscribe to Indian mutual funds’schemes subject to KYC. However, transaction costs will hold key here
§ Withholding tax reduced from 20% to 5% on infrastructure lending through notified funds by FII
Improve flow of funds to infrastructure
§ Allocation of Rs2.14tn to infrastructure under the central plan, up 23% over last year
§ Raising FII investment limits and lower withholding tax for investment through specified route
§ FII can also invest in the bonds of unlisted infrastructure SPVs with lock in period of three years. FII can trade amongst themselves even in lock in period
§ Increase in IIFCL refinancing limits to Rs250bn, Rs200bn in FY11
§ Rs300bn of tax free bonds by Railways, NHAI and HUDCO
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Tax revenues growth driven by corporate tax; input cost pressures may
dent the target
No change in the divestment target from FY11BE
Fert and petro subsidies reduced by ~20%, unlikely case unless some
reforms down the line
Non-plan exp excl subsidies budgeted to decline by 3.4%!!
Plan expenditure under control as per Planning Commission’s directive; no
mention of SBI rights issue
Absolute number in line with exp. The base for % changed to market price
(from factor cost)
Mkt borrowing at Rs3.4tn as expected
While letting short term factors slip away
Receipts FY10A FY11RE FY12BE % yoy chgRevenue receipt 5,728 7,838 7,899 0.8
Tax (net) 4,565 5,637 6,645 17.9Non tax 1,163 2,201 1,254 -43.0
Capital receipt 332 317 550 73.3Revcovery of loans 86 90 150 66.9Others 246 227 400 75.9
Total receipt 6,060 8,156 8,449 3.6
ExpenditureNon-plan expenditure 7,211 8,216 8,162 -0.7Non-plan expenditure (Excl Int) 5,080 5,808 5,482 -5.6
NP-Revenue 6,579 7,267 7,336 0.9Interest 2,131 2,408 2,680 11.3
NP-Capital 632 948 826 -12.8Plan expenditure 3,034 3,950 4,415 11.8
P-Revenue 2,539 3,269 3,636 11.2P-Capital 495 681 779 14.5
Total expenditure 10,245 12,166 12,577 3.4T-Revenue 9,118 10,537 10,972 4.1T-Capital 1,127 1,629 1,606 -1.4
Fiscal surplus/(deficit) -4,185 -4,010 -4,128 2.9% of GDP -6.4 -5.1 -4.6
Revenue surplus/(deficit) -3,390 -2,698 -3,073 13.9% of GDP -5.2 -3.4 -3.4
Primary surplus/(deficit) -2,054 -1,602 -1,448 -9.6% of GDP -3.1 -2.0 -1.6
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Rural development outlay flat despite linking NREGS wages to CPI by
corporate tax; input cost pressures may dent the target
Outlay on edu though higher than last year, not much higher than BE
Urea and other fert sub lower despite naphtha and fuel oil prices up sharply
Petroleum subsidies lower by more than a third despite under-recoveries up
sharply
Only health and irrigation outlay show sharp growth
Rs bn FY10A FY11RE % yoy chg FY12BE % yoy chgRural Development 386 461 19.5 463 0.4
Irrigation & Flood Control 95 112 18.1 135 20.1Energy 98 107 9.0 118 10.4
Transport 483 635 31.4 641 1.0Communications 61 41 -32.9 39 -5.7
Water supply, Housing, Sanitation 247 261 5.8 266 1.8Education, Sports, Youth Affairs 425 515 21.2 583 13.1
Health and Family Welfare 205 222 8.4 271 21.9Total 2,001 2,356 17.7 2,516 6.8
Major Subsidies (Rs bn) FY11RE FY12BE % yoy chgFood 606 606 0.0Indigenous(Urea) Fertiliser 151 133 -11.8Imported (Urea) Fertiliser 64 70 9.2Decontrolled fertiliser 335 297 -11.3Total Fertilizer Subsidy 550 500 -9.1Petroleum Subsidy 384 236 -38.4Total 934 736 -21.1
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Some carried forward balances from FY11 and higher borrowings against small savings keeps the borrowing
stable next year
Indirect tax revenues growth in line with nominal GDP growth rate
Central excise duty and service tax kept unchanged at 10%
We were expecting 2% increase in at least service tax
Funding of expenditure for FY12BE
Tax revenues FY10A FY11RE FY12BE % yoy chgDirect taxes
Corporation tax 2,447 2,964 3,600 21.5Income tax 1,323 1,491 1,720 15.4
Total direct taxes 3,770 4,454 5,320 19.4
Indirect taxesCustoms 833 1,318 1,517 15.1Excise 1,036 1,378 1,641 19.1Service tax 584 694 820 18.2Other taxes 21 25 26 5.7
Total indirect taxes 2,475 3,414 4,004 17.3
Total tax collections (gross) 6,245 7,869 9,324 18.5Transfer to states 1,680 2,232 2,680 20.1
Total tax collections (net) 4,565 5,637 6,645 17.9
Govt borrowings FY11RE FY12BEMarket loans 3,354 3,430Short term borrow ings 100 150External assistance 223 145Small Savings 178 242State provident fund 100 100Others 205 -139Total 4,160 3,928
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ONGC IPO probably not going through this year
Even plan expenditure to see robust growth
Revised estimates for FY11 suggest accelerated expenditure in Q4
Would include subsidy disbursements
Tax revenues revised upwards by Rs400bn as expected
Expenditure to accelerate in Q4FY11
Receipts FY11BE FY11RE % chg Q4FY11I % of Full yearRevenue receipt 6,822 7,838 14.9 1,996 25.5
Tax (net) 5,341 5,637 5.5 1,725 30.6Non tax 1,481 2,201 48.6 270 12.3
Capital receipt 451 317 -29.7 4 1.3Revcovery of loans 51 90 75.5 4 4.6Others 400 227 -43.1 0 0.0
Total receipt 7,273 8,156 12.1 2,000 24.5
ExpenditureNon-plan expenditure 7,361 8,216 11.6 2,847 34.6Non-plan expenditure (Excl Int) 4,874 5,808 19.2 1,902 32.7
NP-Revenue 6,436 7,267 12.9 2,391 32.9Interest 2,487 2,408 -3.2 945 39.2
NP-Capital 925 948 2.5 456 48.1Plan expenditure 3,731 3,950 5.9 1,451 36.7
P-Revenue 3,151 3,269 3.7 1,140 34.9P-Capital 580 681 17.5 310 45.6
Total expenditure 11,092 12,166 9.7 4,297 35.3T-Revenue 9,587 10,537 9.9 3,531 33.5T-Capital 1,505 1,629 8.3 766 47.0
Fiscal surplus/(deficit) -3,819 -4,010 5.0% of GDP -5.5 -5.1
Revenue surplus/(deficit) -2,765 -2,698 -2.4% of GDP -4.0 -3.4
Primary surplus/(deficit) -1,332 -1,602 20.3% of GDP -1.9 -2.0
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Government still has scope to improve on numbers
Petroleum subsidies lower by 38% for FY12BE
§ Price increases in the fuel items
§ Diesel price deregulations
§ Customs duties left unchanged – may be tinkered with later on
Fertiliser subsidies lower by 9% for FY12BE
§ Replicating NBS regime for Urea also
§ The subsidy estimate for imported/indigenous fertilisers at Rs202bn (Rs214bn in FY11RE) despite naphtha, fuel oil prices moving up
Augment revenues through getting parallel economy to mainstream
“89. The Ministry of Finance has commissioned a study on unaccounted income and wealth held within and
outside our country. It would suggest methods to tax and repatriate this illicit money.”
§ Does it mean a VDIS can be announced later on???
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Direct Tax Proposals
Direct tax proposals – Corporate
§ No change in corporate tax rate
§ Surcharge on domestic companies reduced from 7.5% to 5%, MAT increased from 18% to 18.5%of the book profits. SEZ brought under preview of MAT
§ Tax rate of on dividends received by an Indian company from its foreign subsidiary reduced from maximum
marginal rate to 15%.
§ Mutual funds (debt market) will have to pay additional tax on income distribution at 30% as compared to current rate of 20%
§ Weighted deduction on payments made to National Laboratories, Universities and Institutes of Technology to be
enhanced from 175 to 200 per cent.
§ Benefit of investment linked deduction extended to businesses engaged in the production of fertilizers & businesses developing affordable housing
§ Hotel and Hospitals allowed the benefit of setting of losses from new units (commence operation after
01/04/2010) against profits of existing units
§ Benefits under Section 80IA extended by one year to 31st March 2012 for power sector
§ Direct Taxes Code (DTC) to be finalized for enactment during 2011-12. DTC proposed to be effective from April 1, 2012
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Direct Tax Proposals
Direct tax proposals – Individual/Small Businesses
§ Exemption limit for the general category of individual taxpayers enhanced from Rs 1,60,000 to Rs 1,80,000 giving uniform tax relief of Rs2,060.
§ For Senior Citizens, Exemption limit enhanced from Rs. 2,40,000 to Rs. 2,50,000 and qualifying age reduced from 65 to 60 years. Higher exemption limit of Rs. 5,00,000 introduced for Very Senior Citizens, who are 80
years or above.
§ Tax deduction of Rs. 20,000 for investment in long-term infrastructure bonds (over and above Rs. 1,00,000 exemption) proposed to be extended for one more year.
Above Rs 800,000 30Above Rs 500,000
Rs 500,000 to Rs 800,00020Rs 300,000 to Rs 500,000
Rs 180,000 to Rs 500,00010Rs 160,000 to Rs 300,000
Upto Rs 180,000 Lacs0Upto Rs 160,000 Lacs
New SlabTax Rate (%)Old Slab
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Indirect Tax Proposals - Customs
§ Custom duty on Petcoke and Gypsum reduced to 2.5%.
§ Reduction in basic custom duty for specified agriculture machinery from 5% to 2.5%.
§ Custom duty exemption and concessional rate of excise duty extended to batteries imported by manufacturers
of electrical vehicle.
§ Export duty on iron ore finds and iron ore lumps hiked to unified rate of 20% ad valorem from currently 5% and 15% respectively.
§ Reduction in the custom duty on solar lantern from 10% to 5%.
§ Crude palm stearin used in manufacturing of laundry soap fully exempted from basic custom duty.
§ Reduction in custom duty on micro irrigation equipment from 7.5% to 5%.
§ Machinery used for highway development projects will qualify for custom exemption similar to that claimed by tunnel boring machines which are used for Hydro electric projects
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Indirect Tax Proposals - Excise
§ Maintained central excise duty at standard rate of 10%
§ Excise duty on LEDs lowered to 5% and special CVD being fully exempted
§ Lower rate of central excise duty increased to 5% from 4% earlier
§ Excise duty exemption for equipment supply to mega/ultra power projects
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Indirect Tax Proposals – Service Tax
The following services have been brought under the ambit of service tax:
§ Services provided by air conditioned restaurants having a license to service alcoholic beverages in relation to
serving food/ beverages
§ Short-term accommodation provided by a hotel, guesthouse, club or campsite, or other similar establishment for a continuous period of less than 3 months
§ The above services will come into effect post the enactment of Finance Bill, 2011
§ All services, including doctor fees & diagnostics services, provided by centrally air conditioned clinical units
having more than 25 beds
§ In life insurance space, tax shall be charged on the portion of the premium other than the investment amount, when the break-up of premium is shown separately
§ The scope of legal consultancy services is being expanded by including service provided by a business entity to individuals in relation to advice, consultancy or assistance in any branch of law
§ Exemption is being provided to services provided by an organizer of business exhibitions held outside India. Also services related to transportation of goods by roads, rail or air when both the destination and the origin are
located outside India is being exempted
§ A modified scheme is being developed to refund service tax to SEZ developers
Withdrawal or Amendments of Exemptions (effective from 1st Apr, 2011):-
The rates on service tax on travel by air are revised as follows:
a) domestic travel (from Rs100 to Rs150)
b) International travel (from Rs500 to Rs700)
c) domestic travel, other than economy class (10% standard rate)
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Sectoral Impact
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Agri-input & Chemicals - Positive
§ Fertiliser industry to be given the status of infrastructure and any new investment will be entitled for benefit
under section 35-AD for accelerated depreciation along with some custom benefit
§ Fertiliser subsidy for FY11-12 budgeted at Rs 500 bn, below our estimates of Rs 800 bn – as against previous
year subsidy of Rs 550 bn
§ Agriculture lending increased to Rs 4,750 bn (Rs 3,750 bn previous year) in line with estimates while interest
rate subvention of 3% (previous year 2%) with effective interest rate of 4% is positive for the overall sector
§ Excise duty on chemicals unchanged at 10% is positive for the sector. Reduction in custom duty on caprolactam
/ nylon chips from 10% to 7.5% - likely to have adverse impact
GSFCChambal Fertilisers, Tata Chemicals
NegativeNeutralPositive
It is positive since industry was expecting
increase in excise rates by 2%
Current excise duty rates to continueExcise duty on chemicals at 10%
Benefit of lower tax rates and custom dusty
benefits
Fertiliser sector to enjoy infrastructure statusNo extra benefit for capital investment in
fertiliser sector
Subsidy is lower than our estimates. May
result in lower rates under NBS or increase in
prices to the farmers
Subsidy proposed at Rs 500 bnFertiliser subsidy revised at Rs 550 bn
ImpactProposalsCurrent Status
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Automobiles - Positive
§ Status quo maintained with respect to excise duty. A positive for the sector as there were expectation of
increase in excise duty for the auto sector
§ We expect margins to surprise on the upside as no hike in excise duty provides room for raising selling prices to protect against cost pressures from commodity and conversion cost
§ Mutual funds (debt market) will have to pay additional tax on income distribution at 30% as compared to current rate of 20%. This will have marginal impact on the treasury yield of cash rich companies like Maruti, Bajaj Auto, Hero Honda and M&M
§ Indirect benefits continue in the form of increased focus on improving road infrastructure and rural economy
§ The biggest beneficiaries are TVS Motor, Maruti, Ashok Leyland and M&M (higher delta effect to change in excise duty) as reflected by sharp stock price corrections
Ashok Leyland, Bajaj Auto, Hero Honda, M&M,
Maruti, Tata Motors and TVS Motor
NegativeNeutralPositive
No changeExcise duty on UVs/large cars – 22%+Rs
15,000
Positive as there were expectation of increase
in duty
No changeExcise duty on two wheelers three wheelers,
small cars and commercial vehicles -10%
ImpactProposalsCurrent Status
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Banking and Financial Services
§ Flat govt borrowing at Rs3.43tn for FY12 and increase in the FII limits for investment in infra augurs well for
PSU banks – most of them hitting limits on infra lending
§ Interest subvention on short term farm credit raised from 2% to 3%, effective interest rate of 4%
§ Existing limits on house price raised to Rs2.5mn from Rs2.0mn for interest subvention of 1%
§ Provide Rs60bn during FY12 to enable PSB’s to maintain a minimum Tier I CAR of 8 %
§ Agriculture credit at Rs4750bn, up 27%
§ Budget also spelled reforms in financial sector including FDI in Insurance, though didn’t elaborate
§ No mention of SBI rights issue in the planned investments in public enterprises
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Banking and Financial Services
Andhra bank, IOB, Union bank, UCO bank,
PNB, BOB, Bank of Maharashtra, BOI
Positive for banks with lower tier I ratioRecapitalisation fund of Rs60bn
Positive for Pvt sector banks and banks which
has insurance subsidiaries
Proposed to move Insurance bill and banking
amendment bill
Dewan Housing, Gruh Finance, LIC Housing
Finance, HDFC, ICICI Bank, SBI
NegativeNeutralPositive
Positive for HFCs particularly ones with lower
ticket size
Home loan subvention - loan value at Rs1.5mn
and house price at Rs2.5mn
Home loan subvention - loan value at Rs1mn
and house price at Rs1.5mn
Positive for all banksProposed central electronic registry under
SARFAESI Act
Positive for bond yields and liquidity so good
for PSU banks
Government borrowings at Rs3.43tn, FII
investments in infr lending at USD25bn, overall
at USD40bn
Government borrowings at Rs3.35tn, FII
investments in infr lending at USD5bn, overall
at USD20bn
ImpactProposalsCurrent Status
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Cement
§ Excise duty on packaged cement with MRP> Rs190/bag (Exceeding Rs3800/ton) has been revised from ‘10%
of retail sale price’ to ‘10% ad valorem (Ex-factory) +Rs8/bag (Rs160/ton)’. Excise Duty on cement with MRP
<Rs190/bag (not exceeding Rs3800/ton) been revised from Rs290/ton (specific) to 10% ad valorem (Ex-factory)
+Rs4/bag (Rs80/ton). Excise duty on clinker revised from Rs375/ton to 10% ad valorem +Rs200/ton.
Impact : Negative – Duty to go up by Rs2/bag if net realisation is calculated with Freight. NEUTRAL If
calculated ex freight.
§ The basic customs duty on petcoke & gypsum is proposed to be reduced to 2.5 per cent ( 5% earlier). Similarly
customs duty on Rayon Grade wood pulp (RGWP- raw material for manufacturing VSF) reduced to 2.5% (5%
Earlier) Impact: Marginally Positive as petcoke & gypsum at industry level does not form significant part of
cost. Reduction in duty on RGWP will be Positive for Grasim as it imports 60% of its requirement from its
International subsidiaries and international markets.
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Cement
Negative – Duty to go up by Rs2/bag if net realisation is calculated with Freight.
Change in excise duty structure Neutral If calculated ex freight.
Reduction in customs duty on pet coke & Gypsum marginally positive for companies. Shree Cement Could be beneficiary as it entirely uses petcoke
Neutral as very small proportion of cement sold below MRP of Rs190/bag
10% ad valorem + Rs8/bag or Rs160/tonExcise duty on cement below Rs190 @ 290/ton
Change in Excise duty structure for clinker Marginally Negative for Ultratech & Shree Cement
Reduction in duty on RGWP will be positive for Grasim as it imports 60% of its requirement from International subsidiaries and markets
NegativeNeutralPositive
Marginally PositiveReduced from 5% to 2.5%Custom duty on Gypsum & petcoke
Marginally Negative for Ultratech & Shree Cement
10% ad valorem + Rs200/tonExcise Duty on clinker @ Rs375/ton
Negative – Duty to go up by Rs2/bag if net realisation is calculated with Freight. Neutral If calculated ex freight.
10% ad valorem + Rs4/bag or Rs80/tonExcise duty on cement MRP above Rs190 @ 10%
ImpactProposalsCurrent Status
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Engineering & Capital Goods - Neutral
§ Continued thrust on Infrastructure development with 23% increase in plan allocation to Rs2140 bn – (a) Power –up 23% to Rs1555 bn (b) Roads & Bridges – stable at Rs448 bn (c) Urban development – down 5% to Rs82 bn (d) Water & Sanitation up 4% to Rs100 bn (e) Irrigation - up 37% to Rs5.7 bn
§ Allocation to Bharat Nirman increased 21% to Rs580 bn – (a) No change in Indira Awas Yojana at Rs100 bn (b) Rajiv Gandhi Grameen Vidyutikaran Yojana - up 9% to Rs60 bn, (c) Pradhan Mantri Gram Sadak Yojana – up 74% to Rs200 bn
§ Measures mooted for easing funding constraints – (1) IIFCL disbursement target increased 25% to Rs250 bn (2) 50% increase in amount raised through tax free bonds to Rs300 bn (3) Allowed FII investment in Infrastructure SPV and corporate bonds and (4) Projects worth Rs50 bn sanctioned under take-out financing
§ Cold storage chains & warehouses accorded infrastructure status – Planned development of 15 mega food parks & 107 cold storage projects by National Horticulture Board
§ Import Duty and Excise Duty parity brought-in for equipment supply to Mega & UMPP projects -- for expansion at existing projects (anomaly resolved in current budget) and new projects (already applicable)
§ Benefits under section 80IA for (1) power developers (2) laying of transmission and distribution lines – extended by one year – upto 31st Mar’12
Cummins India, Greaves Cotton, Punj Lloyd, Elecon Eng, McNally Bharat, TRF
L&T, BHEL, Thermax, Voltas, Blue Star
NegativeNeutralPositive
Positive for Blue Star, VoltasFully ExemptExcise Duty @ 10% on Commercial Refrigeration for Cold Chains
Positive for LMW, VoltasReduced to 5%Excise Duty @ 10% on spec. textile machinery
Positive for L&T, BHEL, Thermax, McNally Bharat, TRF, Elecon Engineering
Reduced to 2.5% - parity with Customs DutyExcise Duty @ 10% on Equipments supplied to expansion of UMPP / Mega Power projects
ImpactProposalsCurrent Status
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FMCG – Neutral
§ Increase in allocations to development and social programs for rural India - like Indira Gandhi Vikas Yojana, Bharat Nirman, Indira Awas Yojana and Rajiv Gandhi Krisi Vikas Yojana – also various development initiative
for agriculture and rural infrastructure - likely to increase propensity to consume
§ Increase in personal income tax exemption limits from Rs 160,000 to Rs 180,000 - tax savings of Rs 2,000 leading to increase in disposable income, which could boost consumption
§ Cenvat rate remains unchanged at 10% versus expectations for 2% increase- No impact for FMCG companies
§ No change in Excise Duty on Cigarettes versus expectation of marginal increase – higher predictability on earnings of Cigarette companies
§ Increase in Excise Duty on specified goods from NIL rate to 1% duty without Cenvat or 5% duty - Categories covered are branded jewellery, water filters, sanitary napkins, diapers, ready to eat packaged food, margarine,
ketchup, sauces, fruit juice, soups, etc.
§ Full exemption of basic Customs Duty from 20% to NIL rate for Crude Palm Stearin used in manufacture of laundry soap
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FMCG – Neutral
Neutral for FMCG sectorNo ChangeCenvat at 10%
Neutral for FMCG sectorNo ChangeService Charge at 10%
Negative for GCPL, Marico, DaburIncreased to 18.5%MAT Rate is 18%
Neutral for HUL, GCPL, 1% Excise without Cenvat OR 5% Tariff with
Cenvat
NIL Excise Duty on Specific Goods
Godrej Consumer, Marico, TitanITC, Godfrey Philips, HUL
NegativeNeutralPositive
Positive for HUL, ITCReduced to NIL rateCustoms Duty on Crude Palm Stearin is 20%
Positive for ITC, Godfrey PhillipNo ChangeExcise Duty on Cigarettes
ImpactProposalsCurrent Status
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Infrastructure
§ Overall budgetary allocations to infrastructure development up 23% from Rs 1730 bn to Rs 2140 bn
§ Allocation for Bharat Nirman up 21% to Rs 580bn with key focus on Rural Road up 74% to Rs 200 bn
§ Allocation for power sector up 23% to Rs 1554 bn and Railways up 41% to Rs 566 bn
§ Allocation for Roads and highways stays flat at Rs 448 bn, allocation to NHAI at Rs 178 bn largely flat, however allowed NHAI to raise tax free bonds of Rs 100 bn clearly implying focus development through NHDP
§ MAT rate increased from 18% to 18.5% - marginally negative for infrastructure sector, however clubbing the
reduction in surcharge it will lead to an increase in the effective tax rates by 7bps from 19.93% to 20.0%
§ Sunset to the exemption granted to SEZ’s from 1st June 2011 in terms of MAT exemptions and exemptions from the application of DDT provision will be big negative for fresh investments in the SEZ development
§ Extension of additional Rs 20,000 in computing the total income under Sec 80CCF for one more year till Mar-12
§ Increase in FII limit in Bond market by additional USD 20 bn to USD 40 bn, Within the infrastructure sector the limit has been raised from USD 5 bn to USD 25bn considering the long term funding needs
§ To facilitate the setting up of dedicated infrastructure debt fund, the finance bill is seeking an enabling power to amend Sec 10 of income tax act for notifying any infrastructure debt fund which is established in accordance with prescribed guidelines. It is also proposed that any interest received from such debt fund shall be taxable at 5% of
on the gross interest income
§ IIFCL on track to achieve a disbursement of Rs 200 bn by Mar-11, and will reach a cumulative disbursement of Rs 250 bn by Mar-12. Targets for fresh sanctions under the take out financing raised to Rs 50 bn for FY11-12
§ The Delhi Metro – III and Mumbai Metro Link – III will be taken up in 2011-12 and ongoing projects in Bengaluru, Chennai and Kolkata will be provided financial assistance for speedy implementation
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Infrastructure
Neutral - IRB Infra, IL&FS Transportation,
IVRCL, GMR Infra, GVK Power, Ramky Infra
Mat Increased to 18.5% and Surcharge
reduced to 5.0%
MAT Rate @ 18.0% and Surcharge at 7.5%
Negative - GMR Infra, GVK Power, Ramky
Infra
SEZ and SEZ developers brought under the
purview of MAT and dividend distribution tax
SEZ and SEZ developers exempted from MAT
and dividend distribution tax
Positive - Positive for entire sector will result in
easing funding constraints
Sec 80 CCF Investment in long term
infrastructure bond extended till Mar-12
Sec 80 CCF Investment in long term
infrastructure bond expiring on Mar-11
Positive - Positive for entire sector will result in
easing funding constraints
Proposed to provide enabling power to the
central govt to exempt infrastructure debt fund
set up in accordance with the prescribed
guidelines
No provision for dedicated Infrastructure Debt
Fund
Positive - Positive for the entire infrastructure
sector as will offer another avenue to fund
projects
Limit increased to USD 25 bnFII limit in infra Bond limited to USD 5 bn
Negative - Negative for awarding at NHAI,
however, focus will be on private participation
NHAI allocation increased marginally to 178 bn
for FY11-12
NHAI allocation at 176 bn for FY10-11
Positive - IL&FS Transportation, Ramky InfraAllocation for provisions to North Eastern
region and Sikkim increased 9% to 19.9 bn
Provisioning for North Eastern region and
Sikkim for road development at Rs 18.3 bn
GMR Infrastructures, GVK Power & InfraIRB Infra, IL&FS Transportation, Ramky Infra,
Era Infra
NegativeNeutralPositive
ImpactProposalsCurrent Status
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IT – Software – Neutral
§ Union budget remained silent on extending the tax benefits under Section 10A/10B of the Income Tax Act’1961
beyond March’11, as expected.
§ Union Budget 2011 has introduced a sun set clause to exemption from MAT from March31’2012 for SEZ units.
This will have no P&L impact , however would impact cash flows negatively as companies would be allowed to
create deferred tax assets to be setup against future tax liabilities.
§ No change in overall tax rates from increase in MAT rate( 18.5% V/s 18% currently) as it gets negated by
reduction in surcharge to 5%( V/s 7.5% earlier)
All Companies
NegativeNeutralPositive
Effective Tax rate remains unchanged at ~20%Increase MAT to 18.5% of book profits. Corporate Surcharge reduced to 5%
MAT at 18%, Corporate Surcharge at 7.5%
EPS neutral, however cash flow negative for almost all the Indian IT companies as they create deferred tax assets to be offset against future tax liabilities
Sun set clause has been introduced for exemption from MAT for SEZ units from March 31’2012
SEZ units exempt from MAT under section 115JB (6)
Neutral for the IT companies as street estimates largely factor in increase in tax rates from FY12 onwards driven by expiry of Section 10A/10B benefits
Budget remains silent on the sameTax Exemption for STPI units under Section 10 A/10 B for 10 years or March 31’2011 whichever is earlier
ImpactProposalsCurrent Status
28
Media - Neutral
§ No change in the FDI limit
§ No change in service tax with respect to broadcasting industry
§ The concessional basic customs duty of 5% and CVD of 5%, presently applicable to high-speed printing
presses imported by newspaper establishments is being extended to mailroom equipment
All Companies
NegativeNeutralPositive
No impactUnchangedFDI limit of 49% in DTH and cable, 26% in news affairs, broadcasting & print and 20% in radio sector
ImpactProposalsCurrent Status
29
Metals & Mining- Negative for iron ore exporters
Export duty on iron ore hiked to 20%
§ Export duty on iron ore fines and iron ore lumps hiked to unified rate of 20% ad valorem from currently 5% and 15% respectively. This is significantly negative for Sesa Goa (Rs 11 bn reduction at the FY12E EBITDA level translating to loss of Rs 8/ share on the FY12E EPS), as the company exports ~90% of their produce. Marginal impact would be on NMDC, due to negligible exports
§ The impact on domestic steel manufacturers would be neutral, as availability of iron ore fines is not a constraint in India
Basic custom duty increased on all ores and concentrates from 2% to 2.5%
§ This would have neutral to marginally negative impact on Sterlite Industries, as it imports copper concentrates for smelting
§ Slightly positive for companies with mining assets in India- MOIL, Hindustan Copper, Hindustan Zinc
Custom duty on ferro nickel reduced to 2.5% from 5% and exempted fully on stainless steel scrap
§ Positive for stainless steel producers like JSL Stainless
MAT rate is hiked from 18% to 18.5%
§ Very marginal negative impact would be there on Sterlite Industries, Hindustan Zinc and Godawari Power and Ispat
Surcharge on corporate tax reduced to 5% from 7.5%
§ This is a positive development for the companies. Hike in MAT rate would be offset by the reduction in surcharge on corporate tax
30
Metals & Mining- Negative for iron ore exporters
Negative for Sesa Goa (estimated loss of Rs 8/
share on FY12E EPS)
Uniform export duty of 20% on both fines and
lumps
Export duty on iron ore fines and lumps- 5%
and 15% respectively
Neutral to marginally negative for Sterlite
Industries, positive for MOIL, Hindustan
Copper, Hindustan Zinc
Hiked to 2.5%Basic custom duty on all ores and
concentrates at 2%
Slightly positive for stainless steel producers
like JSL Stainless
Reduced to 2.5%Custom duty on ferro nickel at 5%
Sesa Goa, Sterlite industriesAll the steel companies, Hindustan zincMOIL, Hindustan copper, JSL Stainless
NegativeNeutralPositive
Positive for all the companies, to offset hike in
MAT rate
To be reduced to 5%Surcharge of 7.5% on corporate tax
Marginally negative for Sterlite Industries,
Hindustan Zinc, Godawari Power and Ispat
To be hiked to 18.5%MAT rate at 18%
ImpactProposalsCurrent Status
31
Oil and Gas
§ No change in custom and excise duty on crude oil and petroleum products especially Petrol & Diesel - Maintain
status quo
All Companies
NegativeNeutralPositive
No ImpactUnchanged Custom duty of 5% on crude oil and 7.5% on
Petrol and diesel. Central excise duty on Petrol
and Diesel at Rs.14.4/ltr and 4.6/ltr
respectively.
ImpactProposalsCurrent Status
32
Paper - Neutral
§ Concessional excise duty rates applicable for paper sector increased from 4% to 5%
§ MAT rate increased from 18% to 18.5% which is negative for paper companies, however reduction in income
tax surcharge from 7.5% to 5% to set off the impact of the same
§ Import duty on Rayon Grade Pulp (RGP) has been reduced from 5% to 2.5% which should have adverse impact
on BILT. However there is significant discount between imported RGP prices and domestic realisations
§ Custom duty on waste paper reduced from 5% to 2.5%
BILTTNPL, JK Paper
NegativeNeutralPositive
Should have negative impact on RGP
realisations however domestic realisations are
at significant discount to global prices
Reduced to 2.5%Import duty on RGP at 5%
Impact of higher MAT rates to be set off
against lower surcharge
MAT rate increased to 18.5% while income tax
surcharge reduced to 5%
MAT rate at 18% and income tax surcharge of
7.5%
It will have marginal negative impact on all
paper companies since impact of higher excise
duty is likely to be passed on
Excise duty increased to 5%Excise duty at 4%
ImpactProposalsCurrent Status
33
Pharma – Negative
§ All units in SEZ are proposed to pay MAT at 18.5%. This will have negative impact on almost all the domestic
pharma companies having operations in SEZ. Exact quantum of impact cannot be ascertained for each
company.
§ Weighted deduction for research programs from National Agencies has been increased to 200% from 175%.
This will have positive impact on companies sourcing work from National Laboratories.
§ All healthcare services, including doctor fees & diagnostics services, provided by centrally air conditioned
clinical units having more than 25 beds will be charged under service tax.
Almost all domestic pharma companies
operating in SEZ
Biocon / DishmanNone
NegativeNeutralPositive
Marginally positive for large pharma
companies in the area of HIV and rare cancer
medications as these drugs contribute a
smaller proportion of the overall sales
Reduced to 5%Customs duty on life saving drugs at 10%
Positive for pharma companies sourcing work
from National Labs/ IIT
Increased to 200%Weighted deduction for research programs
from National Agencies at 175%
Negative for almost all the domestic pharma
companies as they have operations in SEZ.
Difficult to ascertain the quantum of impact for
each company
Units in SEZ liable to pay MATTax holiday for units in SEZ
ImpactProposalsCurrent Status
34
Power
Negative for Adani Power; largely neutral for other power utilit ies
§ Adani power would be impacted by levy of tax on SEZ developers and units operating in them. Current valuations seems to imply zero tax liability for Mundra for initial 5 years. Levying of MAT rate to reduce NPV of Adani power by 5-8% depending on assumptions of MAT credit and profit available for set off from other plants. However, merger of Adani power with any other company (paying higher taxes) might avoid MAT payment.
§ 80IA has been extended by 1 year to 31st march 2012 - positive for power utilities.
§ Excise duty exemption for equipment supply to mega/ultra mega power projects - positive for power utilities as capital cost are likely to reduce.
§ Concessional rate of 5% customs duty and 5% CVD for parts and components for high voltage transmission equipments - positive for T&D equipment companies.
Positive for power utilities in the long term as capital cost will reduce
Excise duty exemption for equipment supply to mega/ultra mega power projects
Excise duty payable on equipment supply to mega/ultra mega power projects
Negative for T&D companiesAPDRP and RGGVY outlay of Rs20.3bn (down 45%) and Rs60bn (up 9%)
APDRP and RGGVY- budget outlay of Rs37bn & Rs55bn
Positive for T&D equipment companies.Concessional rate of 5% customs duty & 5% CVD
7.5% customs duty and 7.5% CVD for parts & Components for high voltage transmission equipments
Adani Power Ltd, T&D Companies (except for custom duty reduction)
NTPC, Lanco Infra, Reliance Power ,JSW Energy, Jaiprakash Power, Nava Bharat Ventures, KSK, GIPCL
NegativeNeutralPositive
Positive for power utilities as tax holidays would continue to be available
Has been extended by one year to 31st March 2012.
Section 80IA terminal date –up to 31.03.2011
To Impact Adani Power - NPV impact of about 5-8%
Levy of MAT on SEZ developers and units operating in them, FY13 onwards.
No MAT levy on SEZ developers and units operating in them
ImpactProposalsCurrent Status
35
Telecom - Negative
§ MAT rate increased from 18% to 18.5% - Minuscule impact on the earnings of telecom companies
§ Extended the concession available to parts, components and accessories for manufacture of mobile handsets
till 31st March, 2012 and to include few more items in its bouquet
§ Planned to provide Rural Broadband Connectivity to all 2,50,000 panchayats in the country in three years.
Bharti, Idea, Rcom
NegativeNeutralPositive
Negative – Earnings to get impacted marginally
Increased MAT from 18^% to 18.5%Telecom companies fall under MAT Which is currently 18%
ImpactProposalsCurrent Status
36
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