Union Budget 2008-09 - Ventura Budget Special

9 0 8 0 0 2 T E G D U B N O UNI

Overview The budget, coming on the backdrop of global slowdown and uncertain international stock markets, has tried to be both prudent and progressive. The farm loan waiver, increasing in IT limit, cut in excise duty all point to an effort that is aimed in ensuring that the growth engine does not slow down. At the least case, Indian economy is expected to grow at 8.7% as per estimates. The growth story that got started in 2003-04 is very much in place and was largely driven by the domestic consumption. India is one of the few countries that is domestic led economy save and except may be Software. This budget has given the financial stimulus by cutting duties, increasing IT limit thereby not only getting goods to be cheaper but leaving more money in the hands on the consumer and both these acts would push consumption.

Contd….

….Contd Dream Budget for farmers Debt waiver has been the highlight of this budget not only for its impact on farmers but also on the financial health of the banking system. It needs to be understood that the entire write off of Rs 60,000 crore is about 2.75% of the total assets in the banking system. Of these some must have already been provided as per the prudential norms prescribed by RBI that is followed by all banks. Whilst the total figure is known, it is not known as to how much will each and every bank will have to provide and this will play out over a period of time. There might be some trepidation in so far as investments in banks are concerned as the amount has not been provided in the budget though the government is confident of finding ways to compensate and are yet to spell it out.

Report Card †

GDP at factor cost at constant 1999-2000 prices to grow at 8.7% in 2007-08, a deceleration from the high growth of 9.4% & 9.6% in the previous two years

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Per Capita income & consumption at constant 1999-2000 prices up 7.2% & 5.3% at Rs 29,786 & Rs 17,145 respectively

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GDS as a proportion of GDP expected to improve to 35.8% in 2007-08 as compared to an average of 31.4% in 10th five year plan

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The gross tax to GDP budgeted at 11.8% in 2007-08 as compared to 11.4% in 2006-07

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Inflation projected to decline from 5.6% in 2006-07 to 4.1% in 2007-08

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RBI’s policy initiatives have reduced credit growth sharply to 21.5% in Jan’08 as compared to 30.8% in Jan’07

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Revenue deficit for 2007-08 to be at 1.4% (budgeted at 1.5%) and the fiscal deficit at 3.1% (budgeted at 3.3%)

Key Highlights †

Increased government spending proposed in health, education & infrastructure

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Complete waiver of all overdue loans as on on 31st Dec’07 for marginal & small farmers while rebate of 25% under one time settlement scheme for other farmers

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General CENVAT rate on all goods reduced from 16% to 14%

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No changes in peak rate of customs duty

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Income tax threshold raised to Rs 1,50,000

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Short term capital gains to increase from 10% to 15%

Sector Summary Sector

Budget Impact

Key Highlights

Automobiles

Positive

Reduction in excise duty on two, three wheelers & small cars

Pharmaceuticals

Positive

Additional Govt. focus & reduction in excise duty

Not Rated / Negative

Agricultural loan waiver & increase in STCG tax

Banking / Financial Services IT / Training

Neutral

Increased Allocation of funds by govt.

Infrastructure

Positive

Increased fund Allocation to Bharat Nirman, NHDP & AIBP

Power

Positive

Increase outlay for T&D sector & Urge for 5 more UMPP’s

Hotels

Positive

Five year Tax holiday for specified Hotels

Cement

Neutral

Rationalization of Excise duty structure

Metals & Mining

Neutral

Reduction in customs duty on scrap

Refineries / Petrochemicals FMCG

Positive / Negative Positive

Customs duty on naphtha imposed at 5% & specific duties proposed on unbranded diesel & petrol Increased consumer spending to generate volumes

Automobiles Item

Positive Budget Measures

Budget Impact

Companies Impacted

Excise Duty on small cars

Reduction from 16% to 12%

Positive

Positive for Tata Motors, Bajaj Auto & Maruti Udyog

Excise Duty on buses

Reduction from 16% to 12%

Positive

Positive for Tata Motors & Ashok Leyland

Excise Duty on three wheelers

Reduction from 16% to 12%

Positive

Positive for Bajaj Auto & M&M

Back to Sector Summary

Pharmaceuticals Item

Budget Measures

Positive Budget Impact

Companies Impacted

Government Focus

Increased Allocation of 15% to Rs 16,534 crore

Positive

All Pharma companies

Excise Duty on all Pharma products

Reduced from 16% to 8%

Positive

All Pharma companies

Outsourced R&D

Weighted deduction

Positive

All Pharma companies

HIV / AIDS

National Aids Control Programme to provide Rs 993 crore

Positive

Ranbaxy & Panacea Biotech

Polio Eradication

Allocation of Rs 1,042 crore

Positive

Cipla & Panacea Biotech

Back to Sector Summary

Banking / Financial Services Item

Budget Measures

Not Rated / Negative Budget Impact

Companies Impacted

Agricultural Loans

Full Waiver to small & marginal farmers while 25% rebate to other farmers

Not Clear – Further Clarity awaited

All PSU Banks

STT Rationalization

To be treated as deductible expenditure against business income instead of setting off against the tax liability

Negative for brokers Additional tax burden

Few ‘arbitrage’ business model brokers

Short Term Capital Gain Tax

Increase of tax from 10% to 15%

Volumes to get impacted negatively

All broking companies

Back to Sector Summary

IT / Training Item

Neutral Budget Measures

Budget Impact

Companies Impacted

Education services

Increased Allocation of 20%

Positive

Navneet Publications, NIIT, Educomp Solutions, Everron Systems & Aptech

Smart Cards

Launch of smart cards for Public Distribution System

Positive

TCS & HCL Infosystems

Excise Duty on packaged software

Increase from 8% to 12%

Applicable only to domestic sales, hence negligible impact

I-Flex, 3i Infotech & Subex Azure

Back to Sector Summary

Infrastructure Item

Positive

Budget Measures

Budget Impact

Companies Impacted

Bharat Nirman

Increased allocation of 16% by Rs 31,280 crore

Positive

All Infrastructure players

Accelerated Irrigation Benefit Programme (AIBP)

Increased outlay to Rs 20,000 crore

Positive

IVRCL, HCC, Gammon, KSB Pumps & pipe making companies like Jindal Saw, Welspun Gujarat etc

Irrigation & Water Resources Finance Corporation (IWRFC)

Funding of major & medium irrigation projects

Positive

Same as above

National Highway Development Programme (NHDP)

Increased Allocation to Rs 12,966 crore

Positive

Simplex Infra, Gayatri Projects, HCC among others

Back to Sector Summary

Power Item

Positive Budget Measures

Budget Impact

Companies Impacted

Custom Duty on Project Imports

Reduction from 10% to 5%

Positive

Positive for L&T & Reliance Power; Negative for BHEL

UMPP

Urge to open bidding for five more UMPP’s

Positive

Power generation companies in focus

APDRP Project

Additional Provisional of Rs 800 crore

Positive

Power ancillary equipment companies in focus

National Fund for T&D

Increased Outlay

Positive

Power T&D companies in focus

Back to Sector Summary

Hotels Item

Two, three & four star hotels established at 22 World Heritage Sites

Positive Budget Measures

Budget Impact

Companies Impacted

Five Year tax holiday

Positive

All Hotel Companies

Back to Sector Summary

Cement Item

Neutral Budget Measures

Budget Impact

Companies Impacted

Excise Duty

Rs 400/- per tonne or 14% Ad valorem

Mildly negative for companies selling cement below Rs 190/per bag

Madras Cement, Shree Cement Gujarat Siddhee Cement

Bharat Nirman

Increased allocation of 16% by Rs 31,280 crore

Increase in domestic demand

All Cement companies

Back to Sector Summary

Metals & Mining Item

Neutral

Budget Measures

Budget Impact

Increase from Rs 2,000/ton to Rs 3,000 / ton

Increase in production of ferro alloys & consequently stainless steel

Nava Bharat Ferro Alloys, Ferro Alloys Corp, Jindal Stainless & Tata Steel

Customs Duty on Steel melting scrap

Reduction from 5% to NIL

Reduction in cost of production for stainless steel companies – Positive

Jindal Stainless, Tata Steel & JSPL

Customs Duty on Aluminium scrap

Reduction from 5% to NIL

Marginally negative aluminium companies

Nalco, Hindalco & Sterlite Industries

Export Duty on Chrome Ore

Companies Impacted

for

Back to Sector Summary

Refineries / Petrochemicals

Negative / Positive

Item

Budget Measures

Budget Impact

Companies Impacted

Specific Duty proposed on unbranded petrol & diesel

Convert from ad valorem + specific rate to pure specific rate

No cascading effect in the event of future price rise for OMCs dealing in unbranded petrol & diesel – Positive for select OMCs

HPCL, BPCL & IOC

Exemption withdrawn & imposition of 5% Duty

Negative – Increases cost of production of polymers

Petrochemical companies like Reliance Industries

Customs Duty on Naphtha

Back to Sector Summary

FMCG Item

Positive Budget Measures

Budget Impact

Companies Impacted

Excise Duty on tea & coffee mixes

Reduced to NIL

Positive

All tea & coffee companies

Tea & Coffee Fund for re-plantation

Allocation of Rs 40 crore

Positive

All tea & coffee growing companies

Crop Insurance Scheme

To be introduced next year for Tea, rubber, pepper, cardamom etc

Positive

Tea companies, Bombay Burmah & Harrisons Malayalam

Direct Tax structure

Threshold limit of Rs 150,000

Positive – Increase in consumer spending

HUL, Dabur, Godrej Consumer, etc

Back to Sector Summary

Miscellaneous Item / Sector

Sectors & Companies Impacted

Budget Measures

Budget Impact

Wireless Data Cards

Reduction in excise duty from 16% to NIL

Positive

Tata Tele, RCom & Bharti

Textiles

Higher TUF Outlay & schemes for Integrated textile parks

Positive

All textile companies

Paper

Excise Duty reduction from 12% to 8%

Neutral

All paper manufacturing companies

Defence

Increase in fund allocation by 10%

Positive

BEL, BEML, M&M & Astra Micro

Water Purification Devices

Excise Duty reduction from 16% to 8%

Positive

Ion Exchange, HUL & Forbes & Co.

Refrigeration equipment

Exemption of excise duty

Positive

Hitachi Home, Voltas & Blue Star

Policies - Capital Markets †

Short Term Capital Gain Tax increased from 10% to 15% - Negative

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DDT Rationalization: Parent company to set off dividend received from its subsidiary company against dividend distributed by the parent company – Positive for holding companies

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STT Rationalization: To be treated as deductible expenditure against business income instead of setting off against the tax liability - Negative on account of additional tax burden

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Introduction of Commodity Transaction Tax - Negative

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PAN to be made mandatory for all transactions in financial market subject to threshold exemption market

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Initiated steps for setting up of Currency & Futures exchange - Positive for Financial Technologies

Policies – Direct Tax † ¾ ¾ ¾

Threshold limit of exemption from personal income tax increased Male Assesses – Rs 150,000 Female Assesses – Rs 180,000 Senior Citizens – Rs 225,000

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Additional deduction of Rs 15,000 under Section 80D for making medical insurance premium for his / her parents

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No change in the corporate income tax rates

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No change in the rate of surcharge

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Banking Cash Transaction Tax to be withdrawn w.e.f. April 01, 2008

Policies – Indirect Tax †

General CENVAT rate on all goods reduced from 16% to 14%

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No changes in peak rate of customs duty

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Central Sales Tax to be reduced from 3% to 2% from April 01, 2008

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Roadmap for Goods & Service Tax (GST) being prepared to be ready for introduction by April 01, 2010

Policies – Service Tax †

Threshold limit of exemption increased from Rs 8 lakhs p.a. to Rs 10 lakhs p.a. – about 65,000 small service providers to go out of the tax net

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Four additional services to be brought under the Service Tax net: Asset Management Service (AMS) provided under ULIP to bring it on par with AMS provided under Mutual Fund Services provided by stock / commodity exchanges and clearing houses Right to use goods, in cases where VAT is not payable Customized software to bring it on par with packaged software & other IT services

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Conclusion Increased consumption & ample liquidity may fuel growth but the flip side of all this is that it can fuel inflation hence we do not expect any interest rate cut in the near future. Prudent and progressive in all aspects, the budget has tried to cater to all sections and the benefits of this budget will percolate over a period of time as policies take time to get enunciated as tangible results. The negative impact of increase in Short Term Capital Gains Tax will impact trading volumes in the short run but will get evened out over a period of time as markets moves from momentum / speculation to more fundamental and value investing. That journey has clearly started…..

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