13th July 2014

Union Budget 2014-2015

Analysis presented by:-

Equit-I Team:-

Devang Jain

Gyanesh Phulambrikar

Manjot Singh Bedi

Nirmal M.S

Trina Chowdhury

Email Id: - equiti@iimidr.ac.in

Facebook:-Equit-I IIM Indore

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1 Union Budget 2014-2015

Contents Key Initiatives and Their Impact .................................................................................................................... 2

Budget Reactions From Industry Leaders ..................................................................................................... 4

Budget 2014-15 Highlights ............................................................................................................................ 5

Budget Estimates ...................................................................................................................................... 5

Administrative Initiatives .......................................................................................................................... 5

Economic Initiatives .................................................................................................................................. 5

FDI ......................................................................................................................................................... 5

Real Estate and Infrastructure ............................................................................................................. 5

Industry ................................................................................................................................................. 6

MSME Sector ......................................................................................................................................... 6

Textiles .................................................................................................................................................. 6

Agriculture ............................................................................................................................................ 7

Information Technology and Broadcasting ........................................................................................... 7

Culture and tourism ............................................................................................................................. 7

Education .............................................................................................................................................. 7

Financial Sector ......................................................................................................................................... 8

Capital Market....................................................................................................................................... 8

Banking and PSU’s ................................................................................................................................. 8

Defence and Internal Security .................................................................................................................. 8

Social Sector .............................................................................................................................................. 8

Taxation..................................................................................................................................................... 8

Direct Tax Proposals .............................................................................................................................. 8

Indirect Tax Proposals ........................................................................................................................... 9

Service Tax Proposals ............................................................................................................................ 9

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2 Union Budget 2014-2015

Key Initiatives and Their Impact

Rs 7,060 crore provided for developing “100 Smart Cities”

Impact: The concept of smart city is influenced by the idea of developing satellite towns of major cities as well

as other smaller cities which would be running on technology to provide better electricity and water supply,

improve sanitation and recycling, proper traffic and transport management systems. Unless new cities are

developed to accommodate the burgeoning number of people, the existing cities would soon become

unlivable. Creating 100 smart cities was one of the poll promises made by the BJP

Proposed tax incentives for two new investment instruments — REITs and InvITs

Impact: Real estate investment trusts (REITs) will help cash-strapped property developers access cheaper

funds and give local investors the chance to invest in real estate without some of the attendant risks. These

will provide succor to several liquidity starved real estate companies that currently have a high level of debt on

their books. REITs will get pass-through entity status and other incentives and will not have to pay corporate

tax. Infrastructure Investment Trusts (InvITs), is a modified REIT-type structure for infrastructure projects

which would have a similar tax efficient pass through status

Excise duty exemptions for raw materials for solar and wind power projects

Impact: Developing renewable energy will also help reduce dependence on coal, which is in short supply

domestically, requiring imports of the mineral to fuel most of India’s power plants.

FD Relaxation in Real Estate and increase in FDI limit from 26% to 49% in Defence and Insurance

Impact: Opening up of FDI in Real Estate will bring in opportunities for cheaper capital for smaller projects;

improve quality and delivery of low cost and affordable housing projects. Currently a large number of projects

do not fulfill the minimum threshold conditions and thus only big projects are able to attract attention from

foreign private equity funds

Greater foreign investments in the defence sector will help boost domestic manufacturing and create jobs

while cutting India's dependence on import of military equipment. According to Shashwat Sharma, Partner,

KPMG, “Hike in FDI in Insurance should provide impetus for spurring growth of the insurance industry and

enable foreign players to bring in capital required for growing distribution, product suite and strengthening

the risk framework. This move may enable existing players to expand their reach in Tier II and Tier III cities”

Setting up of Rs 10,000 crore venture capital fund for MSME and review of definition of MSME

will be reviewed to provide for a higher capital ceiling

Impact: VC Fund will act as a catalyst to private capital by providing quasi-equity, soft loan, and other risk

capital for start-up companies and will encourage more risk capital and equity-based fund flow to

entrepreneurs. Quantum of allocated funds may not be adequate to meet the needs of India's growing base of

first generation entrepreneurs. The success of such a fund will largely depend on implementation

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3 Union Budget 2014-2015

Personal tax sops: Exemption under Income tax, Investment under 80C and PPF raised

Impact: This will benefit all individuals and also achieve the twin objectives of encouraging the households to

make long-term savings, and also increase overall savings rate which has fallen considerably over the last five

years

Investment allowance of 15% to manufacturing companies, 10 year tax holiday to generation,

distribution and transmission of power,

Impact: The investment allowance for companies will boost investment in indigenous industry and help

overcome cheap, low-cost imported products. Extension of the 10-year tax holiday to 2017 should encourage

new investments especially in private sector, across all segments of generation, transmission, and distribution

Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial

sector and one single operating demat account

Impact: This will encourage consumers to participate in Indian capital markets. The single demat account will

make life of consumers easier as they can track all investments through a single window

Rise in long term capital gain tax rate on debt oriented mutual funds from 10.3% to 20.6% and the

capital gain is applicable if the units of Debt Funds are kept for more than 3 years

Impact: - Investors will have to pay long‐term capital gain tax after three years at the rate of 20% with

indexation. (10% with indexation is removed). So, debt mutual funds including FMPs with the time horizon or

maturity period below three years become unattractive especially for investors who have investment horizon

between 1 to 3 years. This has also reduced tax arbitrage between fixed deposit and debt mutual funds

Banks permitted to raise long-term funds for infrastructure lending with minimal regulatory

restrictions such as CRR, SLR and priority sector lending

Impact: - Proposed bonds for infrastructure sector will help banks to manage the asset-liability mismatch.

Moreover, minimum regulatory pre-emption on such bonds will reduce their cost (by up to 120 bps)

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4 Union Budget 2014-2015

Budget Reactions From Industry Leaders

“After the excitement of the election and Narendra Modi's very large victory, and the associated rally in

Indian markets since, for me personally, the budget was a slight disappointment. While emphasising a

commitment to budget restraint especially for future years, as well as announcing some steps for

boosting FDI in a couple of sectors, there was no real "wow" factor from what I could see”

Jim O’Neil,

Former Chairman,

Goldman Sachs Asset Management

“Arun Jaitley's budget for 2014-15 has pulled out a balancing act and clearly spells out a vision that the new

government will be committed to push the growth pedal by encouraging investment in the economy in the coming

years. A clear commitment to rein in the fiscal deficit in line with the FRBM Act in a calibrated fashion,

implementing the long pending GST framework within FY14-15 and liberalizing FDI restrictions in key sectors

happened to be the most distinguishing elements of this year's budget at a macro level.”

Sunil Bharti Mittal,

Chairman, Bharti Enterprises

“Budget 2014 has been a good start in addressing the structural issues. In the presentation of the new

government's first Budget, I was encouraged by the tone of the administration, particularly towards fostering a

strong investment climate that will attract FDI, streamlining a complex tax regime, particularly by pushing through

a solution for the goods and services tax and a focus on fiscal prudence”

Tony Fernandes,

Chairman, Air Asia

“Budget 2014 clears air on taxation and pushes infrastructure and manufacturing sectors. The new government's

maiden Budget is sober and responsible. There are no pretensions of big bang reforms. It is firmly anchored to the

reality of a weak fiscal position. Yet, it also accords due emphasis to stoking growth, particularly in the

infrastructure and manufacturing sectors”

Kumar Mangalam Birla,

Chairman, Aditya Birla Group

“Bonds to give long-term loans to infra would be cost effective because additional cost of SLR/CRR won’t apply in

this case. According to her this is very logical because if you will raise very long-term bonds, they should not have a

requirement of liquidity reserves. This would just ensure that the banks can go out there and fund projects without

taking asset liability mismatches in their own books”

Chanda Kochhar,

MD & Chairman, ICICI Bank

“While the Budget announced by Finance Minister Arun Jaitley will be useful in increasing investments and hence

growth, some aspects of it will need a reduction in minimum alternate tax (MAT) for proper execution”

Adi Godrej,

Chairman, Godrej Group

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5 Union Budget 2014-2015

Budget 2014-15 Highlights

Budget Estimates

Fiscal deficit target set at 4.1% and revenue target set at 2.9% of the 2014/15 GDP.

Fiscal deficit target for 2015/16 seen at 3.6% and for 2016/17 seen at 3% of GDP.

Finance Minister aims at a sustained growth of 7-8% in next 3-4 years.

Non-plan Expenditure of Rs 12,19,892 crore with additional provision for fertilizer subsidy and Capital

expenditure for Armed forces

Rs 5, 75,000 crore plan expenditure – increase of 26.9 per cent over actuals of 2013-14.

Gross Tax receipts of Rs 13,64,524 crore estimated

Administrative Initiatives

Convergence with International Financial Reporting Standard (IFRS) by Adoption of the new Indian

Accounting Standards (2nd AS) by Indian Companies.

The contours for Goods and Services Taxation to be finalized this fiscal. The government of India is looking

into DTC proposal.

Committed to provide a stable and predictable taxation regime that would be investor friendly and spur

growth. All fresh cases arising out of the retrospective amendments of 2012 in respect of indirect

transfers and coming to the notice of the Assessing Officers will be scrutinized by a High Level Committee

to be constituted by the CBDT before any action is initiated

Economic Initiatives

FDI

The composite cap of foreign investment in defence manufacturing and insurance sector to be raised to

49 per cent with full Indian management and control through the FIPB route.

Requirement of the built up area and capital conditions for FDI to be reduced from 50,000 square meters

to 20,000 square meters and from USD 10 million to USD 5 million with a three year post completion lock

in for the development of smart cities.

Projects which commit at least 30% of the total project cost for low cost affordable housing will be

exempted from minimum built up area and capitalization requirements, with a 3 year lock-in

Foreign owned manufacturing units allowed to sell their products through retail including e commerce.

Real Estate and Infrastructure

A sum of Rs 7,060 crore is provided in the current fiscal for the project

of developing “100 Smart Cities” as satellite towns of larger cities and

by modernizing the existing mid-sized cities

Will provide the necessary tax changes to introduce real estate

investment trusts (REITS) and infrastructure investment trusts (INVITS)

to reduce the pressure on the banking system while also making

available fresh equity

Proposes Rs 4,000 crore for low cost affordable housing through

National Housing Bank (NHB) and extending tax incentives for housing

loans by increasing the deduction limit on account of interest on loan

in respect of self occupied house property from Rs 1.5 lakh to Rs 2 lakh

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6 Union Budget 2014-2015

Increase in allocations for 2014-15 to Rs 8,000 crore for National Housing Bank (NHB) to support Rural

Housing

Shyama Prasad Mukherji Rurban Mission for integrated project based infrastructure in the rural areas

Rs 500 crore for “Deen Dayal Upadhyaya Gram Jyoti Yojana” for feeder separation to augment power

supply to the rural areas

Rs 14,389 crore provided for Pradhan Mantri Gram Sadak

Yojna (PMGSY).

Slum development to be included in the list of Corporate

Social Responsibility (CSR) activities

SEZs will be developed in Kandla and JNPT.

Scheme for development of new airports in Tier I and Tier II

Cities to be launched

Rs 100 crore for metro projects in Lucknow and Ahmedabad

Rs 2,250 crore for the development and modernization of the border infrastructure

Rs 1,000 crore to enhance rail connectivity in the Northeast

An investment of an amount of Rs 37,880 crores in NHAI and State Roads is proposed which includes Rs

3000 crores for the North East

Rs 500 crores provided for Ultra Mega Solar Power Projects in Rajasthan, Gujarat, Tamil Nadu, Andhra

Pradesh and Ladakh

Industry

Rs 100 crore provided for setting up a National Industrial

Corridor Authority.

Master planning of 3 new smart cities in the Chennai-

Bengaluru Industrial Corridor region, viz., Ponneri in Tamil

Nadu, Krishnapatnam in Andhra Pradesh and Tumkur in

Karnataka to be completed.

Amritsar Kolkata Industrial master planning to be

completed expeditiously.

MSME Sector

Fund of Funds with a corpus of Rs 10,000 crore for providing equity through venture capital funds, quasi

equity, soft loans and other risk capital specially to encourage new startups by youth.

Corpus of Rs 200 crore to be set up to establish Technology Centre Network.

Definition of MSME to be reviewed to provide for a higher capital ceiling.

A nationwide “District level Incubation and Accelerator Programme” to be taken up for incubation of new

ideas and necessary support for accelerating entrepreneurship

Textiles

Sum of Rs 500 crore for developing a Textile mega-cluster at Varanasi and six more at Bareilly, Lucknow,

Surat, Kutch, Bhagalpur and Mysore.

Rs 50 crore is provided to set up a Trade Facilitation Centre and a Crafts Museum to develop and promote

handloom products and carry forward the rich tradition of handlooms of Varanasi.

Rs 20 crore to set up a Hastkala Academy for the preservation and revival of the handloom/handicraft

sector in PPP mode in Delhi and Rs 50 crore to start a Pashmina Promotion Programme (P-3) and

development of other crafts of Jammu & Kashmir

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7 Union Budget 2014-2015

Agriculture

An amount of Rs 100 crores set aside for “Agri-tech

Infrastructure Fund”

To mitigate the risk of price volatility, Rs 500 crore is

provided for establishing a “Price Stabilization Fund”

Setup of “National Adaptation Fund” for climate change

with an initial sum of Rs 100 crore

Allocation of Rs 5,000 crore provided for the Warehouse

Infrastructure Fund

To provide institutional finance to landless farmers, it is

proposed to provide finance to 5 lakh joint farming groups of “Bhoomi Heen Kisan” through NABARD.

Long Term Rural Credit Fund to set up for the purpose of providing refinance support to Cooperative

Banks and Regional Rural Banks with an initial corpus of` 5,000 crore

Corpus of Rural Infrastructure Development Fund (RIDF) raised by Rs 5000 crores to Rs 25000 crores.

Information Technology and Broadcasting

Pan India programme “Digital India” with an outlay of Rs 500 crore to be launched

Rs 100 crore allocated for 600 new and existing Community Radio Stations

Rs 100 crore is provided for Kisan TV, to disseminate real time information to the farmers on issues such

as new farming techniques, water conservation, organic farming etc

Culture and tourism

Electronic Travel Authorization (e-Visa) Facility to be introduced

in phased manner at 9 airports

Rs 500 crore provided for developing 5 tourist circuits around

specific themes

Sarnath-Gaya-Varanasi Buddhist circuit to be developed with

world class tourist amenities

Education

Five more IIMs to be opened in HP, Punjab, Bihar, Odisha and

Rajasthan.

Five more IITs in Jammu, Chattisgarh, Goa, Andhra Pradesh and

Kerala.

Four more AIIMS like institutions to come up in Andhra Pradesh,

West Bengal, Vidarbha in Maharashtra and Poorvanchal in Uttar

Pradesh

Four more AIIMS like institutions to come up in Andhra Pradesh,

West Bengal, Vidarbha in Maharashtra and Poorvanchal in Uttar

Pradesh

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8 Union Budget 2014-2015

Financial Sector

Capital Market

Introduction of uniform KYC norms and inter-usability of the KYC

records across the entire financial sector. Introduction of one single

operating demat account.

Uniform tax treatment for pension fund and mutual fund linked

retirement plan.

Banking and PSU’s

Requirement to infuse Rs 2, 40,000 crore as equity by 2018 in PSU banks in line with Basel-III norms.

Capital of banks to be raised by increasing the shareholding of the people in a phased manner.

PSUs to invest over Rs 2.47 lakh crore this fiscal to create a virtuous investment cycle

Banks to be encouraged to extend long term loans to infrastructure sector with flexible structuring. Banks

to be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-

emption such as CRR, SLR and Priority Sector Lending (PSL)

Six new debt recovery tribunals to be set up to curb rising NPA’s of the banks

Defence and Internal Security Capital outlay for Defense increased by Rs 5000 crore

including a sum of Rs 1000 crore for accelerating the

development of the Railway system in the border areas.

Rs 100 crore is provided to set up a Technology Development

Fund for Defense.

Total amount kept aside for defense projects is Rs 6,200

Crores.

Total amount kept aside for internal security projects is Rs

6,440 Crores.

Social Sector Mandatory wage ceiling of subscription to EPS (Employee Pension Scheme) raised from Rs 6,500 to Rs

15,000 and a provision of Rs 250 crore has been made in the budget

Minimum pension increased to Rs 1,000 per month. Initial provision of Rs 250 crore

“Van Bandhu Kalyan Yojna” launched with an initial allocation of Rs 100 crore

Beti Bachao, Beti Padhao Yojana to generate awareness and help in improving the efficiency of delivery of

welfare services meant for women.

Rs 150 crore allocated for increasing safety of women in large cities

Govt provides Rs 500 crore for rehabilitation of displaced Kashmiri migrants

Taxation

Direct Tax Proposals

Income tax exemption raised by Rs 50,000 to Rs 2.5 Lakh and

for senior citizen raised to 3 Lakh.

Exemption limit for investment in financial instruments under

80C raised to Rs 1.5 Lakh from Rs 1 Lakh

In the PPF Scheme, annual ceiling will be enhanced to Rs 1.5

lakh p.a. from Rs 1 lakh at present

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9 Union Budget 2014-2015

Investment allowance @15% to manufacturing companies that invests more than Rs 25 crore in any new

year in new plant and machinery.

10 year tax holiday extended to undertakings which begin generation, distribution and transmission of

power by 31.03.2017.

Long term capital gains taxation for mutual funds other than equity oriented funds doubled to 20 percent.

However the lock in period was increased to 3 years.

Income and dividend distribution tax to be levied on gross amount instead of amount paid net of taxes.

In case of non-deduction of tax on payments, 30% of such payments will be disallowed instead of 100%.

Withholding taxes on corporate bonds raised to 5% until June 30, 2017.

Net effect of direct tax proposals to result in revenue loss of Rs 22,200 Crore.

Indirect Tax Proposals

To encourage production of LCD and LED TVs below 19 inches in India, basic customs duty on LCD and LED

TV panels below 19 inches reduced from 10 percent to NIL.

To give an impetus to the stainless steel industry, increase in basic customs duty on imported flat-rolled

products of stainless steel from 5 percent to 7.5 percent.

Concessional basic customs duty of 5 percent extended to machinery and equipment required for setting

up of a project for solar energy production and compressed bio gas plants.

Basic customs duty increased to 5% on coal and coke

Basic custom duties on semi-processed, half cut and broken diamonds and coloured gem stones

rationalized at 2.5%.

Export duty on bauxite increased from 10 to 20%.

To incentivize expansion of processing capacity, reduction in excise duty on specified food processing and

packaging machinery from 10 percent to 6 percent

Reduction in the excise duty from 12 percent to 6 percent on footwear of retail price exceeding 500 per

pair but not exceeding 1,000 per pair.

Specific rates of excise duty increased on cigarettes in the range of 11 per cent to 72 per cent.

Excise duty increased from 12 percent to 16 percent on pan masala, from 50 percent to 55 percent on

unmanufactured tobacco and from 60 percent to 70 percent on gutkha and chewing tobacco.

Levy of an additional duty of excise at 5 percent on aerated waters containing added sugar.

To finance clean environment initiatives, clean energy cess increased from 50 per tonne to 100 per tonne

Tax proposals on the indirect taxes side are estimated to yield Rs 7,525 crore

Service Tax Proposals

Services by air-conditioned contract carriages and technical testing of newly developed drugs on human

participants brought under service tax.

Services provided by Indian tour operators to foreign tourists in relation to a tour wholly conducted

outside India to be taken out of the tax net and Cenvat credit for services of rent-a-cab and tour operators

to be allowed to promote tourism.

Service tax exempted on loading, unloading, storage, warehousing and transportation of cotton, whether

ginned or baled.

Services provided by the Employees’ State Insurance Corporation for the period prior to 1st July 2012

exempted, from service tax.

Exemption available for specified micro insurance schemes expanded to cover all life micro-insurance

schemes where the sum assured does not exceed 50, 000 per life insured

Indian Customs Single Window Project’ to facilitate trade, to be implemented.

24X7 customs clearance facility extended to 13 more airports in respect of all export goods and to 14

more sea ports in respect of specified import and export goods to facilitate cargo clearance