Prepared by Research Team Tel: +91-22-40953786
Budget Highlights 2009-10
Overview
Finance Minister, Pranab Mukherjee, has presented the budget for FY 2010. The estimated expenditure has crossed Rs 10,00,000cr mark for the first time and stands at Rs 10,20,838cr, of which planned estimated expenditure is Rs 3,25,149cr and non-planned estimated expenditure is Rs 6,95,689cr. Pranab Mukherjee aims to sustain a GDP growth of 9.0% at the earliest and create 12mn jobs per annum by targeting 4.0% growth in agriculture and sustaining momentum in exports. He also plans to reduce the number of people living below poverty line to less than 50% of current level by 2014. The fiscal deficit in FY2009 has widened to 6.2% of GDP from 2.7% in the last fiscal. Further, the fiscal deficit is expected to increase to 6.8% of GDP in FY2010. The Finance Minister has planned to complete tax reform process in next four years. Some of the major changes in relation to direct taxes include the following: • • • No changes in the Corporate Tax rates Surcharge of 10.0% on personal income tax has been abolished Exemption limit in personal income tax has been raised by Rs 15,000 to Rs 2,40,000 for senior citizens; by Rs 10,000 to Rs 1,90,000 for women; and by Rs 10,000 to Rs 1,60,000 for all other categories of individual taxpayers • • The government will also announce new direct tax code in 45 days Deduction under section 80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with severe disability being raised from the present limit of Rs 75,000 to Rs1lac • Fringe Benefit Tax (FBT) on the value of certain fringe benefits provided by employers to their employees has been abolished • Minimum Alternate Tax (MAT) has been increased to 15.0% of book profits from 10.0%. The period allowed to carry forward the tax credit under MAT to be extended from seven to ten years • • The government will introduce Goods & Service Tax (GST) with effect from 1 April, 2010 Commodity Transaction Tax (CTT) has been abolished
st
6th July, 2009
FOR PRIVATE CIRCULATION
1
`
Impact on Industries
Logistics
Road transportation companies like TCI and Gati would benefit from the allocation to NHAI Logistics sector in India will be indirectly benefited from the recent budget announcement by the Finance Minister. The Finance Minister has increased the allocation on National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) by 23.0% over FY2009. We expect companies like TCI, Gati would be able to get the benefits from this development as these companies are mainly in road transportation and any development in road and highways would be beneficial to these companies since this development would save the operating expenses of the company by reducing its fuel cost and time. However, the Finance Minister has imposed service tax in relation to service provided on transport of goods by rail, service provided in relation to transport of coastal cargo and goods through inland water including National Waterways. We expect this step would have an overall negative impact on all the companies operating in this sector. This would include all the operators in Shipping sector and rail-based transportation sector. Concor, Gateway Distriparks are likely to benefit from the increased allocation to railways The allocation for Railway has also been increased to Rs 15,800cr in FY2010 from Rs 10,800cr. We expect increased allocation to help the rail based container movement. Companies like Concor, Gateway Distriparks would be able to get its benefit as Concor is the leader in rail-based transportation while Gateway Distriparks is the second largest in this business.
Automobiles
Tata Motors, Ashok Leyland and Eicher Motors are expected to benefit from the excise duty reduction on petrol driven trucks/lorries The Finance Minister has announced reduction in excise duty on petrol driven trucks/lorries to 8.0% from the earlier rate of 20.0%. The excise duty on chassis of these trucks/lorries would be reduced to 8.0% plus Rs 10,000 from 20.0% plus Rs 10,000. While the Passenger vehicle segment is witnessing continuous growth every month, the commercial vehicle segment is not showing any sign of recovery. We expect that this step will definitely benefit the commercial vehicle sector which is registering negative growth in unit sales since last couple of months. This will directly reduce the cost of production and ultimately turn out to be beneficial to the customers as the manufacturer would reduce market price of the vehicle. We believe this step will be beneficial to Tata Motors which is the largest manufacturer of commercial vehicles. Apart from Tata Motors, commercial
6th July, 2009
FOR PRIVATE CIRCULATION
2
vehicle manufacturer companies like Ashok Leyland, Eicher Motors, etc. would also get benefit from this move.
Consumer Goods
• There has been a reintroduction of concessional customs duty of 5% on specified machinery for tea, coffee and rubber plantations for a period of one year up to 6 July 2010 • However, customs duty on ‘mechanical harvester’ for coffee plantation would be reduced from 7.5% to 5%. Countervailing Duty (CVD) on such harvesters has also been reduced from 8% to 0% by way of excise duty exemption. This could be a positive move for companies like Nestle, HUL and Tata Tea in the sector Biscuit manufacturers like ITC, Britannia will continue to enjoy excise duty at 4% • The excise duty on biscuits, sharbats, cakes and pastries would continue at 4% as against other categories where the duty has been raised to 8%. But, the biscuit manufacturers were expecting total excise duty exemption and reduction in VAT rate to a uniform 4% which varies to as high as 12.5% in many states. This would have resulted in passing of lower prices to consumers and increase in volume growth for biscuit manufacturers like ITC and Britannia • There has been no change effected in the import duty on edible oil and this category continues to attract nil import duty. This is beneficial for players like Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd (GCPL) • The abolishment of FBT and implementation of GST which will align the taxes across the country is expected to be positive for the sector as it will lower the cost burden • Increase in tax exemption is expected to spur consumer demand but the increase in MAT by 5% is likely to be negative for GCPL and Dabur The rural demand is expected to get a push from the NREGA and Bharat Nirman initiatives • The increase in tax slabs by Rs 10,000 would increase the disposable income which is expected to increase the consumer demand • The increase in MAT rate from 10% to 15% would be negative for companies who pay lower tax rate like GCPL and Dabur
th
Retail
The excise duty exemption on branded jewellery will prove to be beneficial for Gitanjali and Titan who are the leading players in the segment • In the Gems & Jewellery segment, the excise duty on branded jewellery segment has been reduced from 2% to Nil. This exemption is expected to be beneficial for leading companies like Titan whose brand Tanishq is into branded jewellery retail and Gitanjali Gems. This could result in a fall in the prices of branded jewellery in the market. The exemption has come at a strategic moment when these retailers are planning for aggressive expansion of their
6th July, 2009
FOR PRIVATE CIRCULATION
3
retail network. Tanishq is planning to set up 3-4 large-format stores in leading metros during FY2010. The brand is also looking to be a bigger player in the wedding market. Gitanjali Group, which others offers branded ornaments under Gili, D’Damas, and Nakshatra brands, is also planning to launch 30 new branded jewellery ‘Gitanjali Jewels’ stores across the country, to its already existing retail chain of 38 stores. The increase in custom duty on gold and silver is likely to bring down the imports in the country • Customs duty on serially numbered gold bars (other than tola bars) and gold coins would be increased from Rs 100 per 10 gram to Rs 200 per 10 gram. Customs duty on other forms of gold to be increased from Rs 250 per 10 gram to Rs 500 per 10 gram. Customs duty on silver to be increased from Rs 500/kg to Rs 1000/kg. These increases would also be applicable when gold and silver (including ornaments) are imported as personal baggage. With India being the largest consumer and importer of gold and silver in the world, the increase in customs duty is likely to result in fall in the import of gold and silver in the country. Industry players like Rajesh Exports may get impacted by this move. The demands of the retail industry for FDI increase, industry status and abolition of service tax have not been addressed in the budget • The budget remained muted on the issue of allowing FDI (Foreign Direct Investment) in multi-brand retail and increasing FDI limit in single brand retail from the existing 51% to 74% which would have been positive for many retail companies which are falling short of funds for expansion. The retail sector was also demanding “industry” status which would have reduced interest rate burden on debt taken by retailers. The retail companies were also seeking the abolition of service tax charged at 12.5% on retail rentals which would have had positive impact on the net profit of all the retailers.
Textiles
The introduction of GST is expected to eliminate the negative effects of multiple taxes across the states • The textile industry was eagerly awaiting the implementation of a comprehensive Goods and Service Tax (GST), which will help in eliminating multiple taxes. This demand has been met by the budget wherein the government would accelerate the process for smooth introduction of the GST with effect from 1 April, 2010 • Customs duty on cotton waste and wool waste has been reduced from 15% to 10% • • Excise duty exemption of 4% on pure cotton would now be restored Excise duty on man-made fibre and yarn has been increased from 4% to 8%. This measure was against the industry demand for a complete removal of the duty • List of specified raw materials and equipment imported by manufacturerexporters of textile products which are fully exempt from customs duty, subject
st
6th July, 2009
FOR PRIVATE CIRCULATION
4
to specified conditions, to be expanded. The inclusion of more items in this list would have a positive impact on the sector as companies would be able to enjoy more benefits on imports of a large variety of items • Extension of the existing 2% interest subvention scheme for exporters till March 2010 • One handloom mega cluster each in West Bengal and Tamil Nadu and one powerloom mega cluster in Rajasthan would be set up. New mega clusters for carpets would be set up in Srinagar (J&K) and Mirzapur (UP) The budget did not address some of the major demands from the textile sector which is likely to impact companies like Century Textiles, Alok Industries and others
The budget has been quite disappointing for this sector as the key demands for the sector have not been met. The industry had been asking for removal of excise duties on all man-made fibres and scrapping of service tax. Also, there was demand for restoration of a 4% interest rate subsidy on bank loans for exporters. Though the government has announced extension of the existing 2% interest subvention scheme for exporters till March 2010, the same was not increased to 4%, as demanded by the sector. The industry had also expected increase in duty drawback and DEPB (Duty Entitlement Pass Book) rates to 5% from 3%, but the same has not been done. The impact of these government moves could negatively impact companies like Century Textiles, Alok Industries.
Infrastructure
As expected, the government has sustained thrust on the infrastructure construction sector taking into consideration its impact on the overall economic development of the country. Finance Minister Pranab Mukherjee in his Budgetary Speech has announced the UPA Government’s long term plan which is in pace with the 11 five year plan, to hover up Infra investment above 9% of GDP by 2014.
th
•
IIFCL to evolve a takeout financing scheme in consultation with banks to facilitate lending to infrastructure sector.
IIFCL and banks are in a position support projects for infrastructure development
•
IIFCL to refinance 60% of commercial bank loans for PPP projects in critical sectors over the next 15-18 months. IIFCL and banks are now in a position to support projects involving total investment of Rs 1,00,000cr
•
Allocation to NHAI for NHDP to increase by 23% over budget estimate (B.E) 2008-09 in B.E. 2009-10 and allocation for Railways increased from Rs 10,800cr in Interim B.E. 2009-10 to Rs 15,800cr in B.E. 2009-10 from B.E 09-10
6th July, 2009
FOR PRIVATE CIRCULATION
5
•
Brihan Mumbai Storm Water Drainage Project (BRIMSTOWA) project was initiated in 2007 to address the problem of rain water flooding in Mumbai; the budgetary allocation for this project has been enhanced from Rs 200cr in Interim B.E. 2009-10 to Rs 500cr in B.E. 2009-10 to expedite completion of the project
•
Allocation in Accelerated Irrigation benefit program (AIBP) has been increased by 75% over the previous year’s budgetary allocation
•
Allocation for Bharat Nirman has been increased by 45% in B.E 09-10. The allocation for Pradhan Mantri Gram Sadak Yojana (PMGSY) increased by 59% over B.E. 2008-09.
The government initiatives including easier lending by IIFCL; increased outlay for roads, highways and railway development would be beneficial for major players in the sector like IVRCL, Simplex Infrastructure and others
We expect the union budget to have a positive impact on the sector. Easier lending to this sector has been on top priority in the wish list which has partly been taken care of through higher allocation by way of providing a mechanism through IIFCL .Our belief that the road sector would witness a jump in order inflow has been successfully met with. The intended clearing of regulatory bottlenecks for infrastructure projects will help bring forward many pending projects, thereby boosting the construction sector. However, we had expected a re-introduction of Section 80M, which provides for deduction in dividends received from subsidiaries for computation of dividend distribution tax, and that has not been taken into consideration. Key beneficiaries from higher order inflows are expected to be IVRCL, Nagarjuna Constructions, Patel Engineering, Simplex Infrastructure, Madhucon Projects and Unity Infra projects.
Cement
Government’s thrust on infrastructure will directly benefit key players in the cement sector There was no major announcement in today’s Budget directly impacting the Cement industry. However we believe that the sector will indirectly benefit from the government’s thrust on infrastructure and the huge infra spending announced. However considering the huge capacity additions by leading cement companies, the budget impact on the sector is likely to be neutral.
Oil & Gas
The government plans to set up an expert group for establishing a system to viable petrol pricing which is likely to benefit OMCs like IOCL, BPCL and HPCL as well as upstream companies like ONGC Government to set-up expert committee to advice on petrol pricing With almost three quarters of oil consumption met through imports, the government has said that it is important to keep the domestic prices of petrol and diesel in sync with global prices. Hence, the government has planned to set up an expert group to advice on a viable and sustainable system of pricing petroleum products. Thus,
6th July, 2009
FOR PRIVATE CIRCULATION
6
domestic oil marketing companies (OMCs) like IOCL, BPCL and HPCL, if allowed to follow global prices for petrol and diesel, will see less under-recoveries leading to less subsidy burden for the government as well as upstream companies like ONGC, GAIL and OIL. This will also help private players like RIL and Essar oil to reopen their outlets for petrol and diesel distribution that they had to close down because of government regulated prices which hampered their margins. Tax holiday on commercial production of mineral oil and natural gas on NELP VIII Tax holiday under section 80-IB(9) of the Income Tax Act, which was so far available in respect of profits arising from the commercial production or refining of mineral oil, is now proposed to be extended to natural gas. This tax benefit will be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the NELP-VIII round of bidding. The section to be retrospectively amended to provide that “undertaking” for the purposes of section 80-IB (9) will mean all blocks awarded in any single contract. Exploration & Production (E&P) companies like state-owned ONGC as well as private players like RIL, Cairn, Shell are expected to be benefited from this seven years tax holiday, if contracted. Government plans to link gas pipelines across the country with the National Gas Grid which will be beneficial to CGD companies like GAIL, IGL and GSPL Natural gas infrastructure development to facilitate transportation of gas across the country With the exploration of natural gas in the KG Basin on the Eastern offshore of India, the indigenous production of natural gas is expected to double, thus, emerging as an important source of energy. expanded. LNG infrastructure in the country is also being
Tax holiday extended to natural gas would benefit E&P companies like ONGC, RIL, Cairn
Government proposes to develop a blueprint for long distance gas
highways leading to a National Gas Grid. This would facilitate transportation of gas across the length and breadth of the country. We expect the government to come up with different contracts for the gas infrastructural development across the country which would attract city gas distribution companies like GAIL, IGL and GSPL. Pipeline network to be incentivized by providing investment linked tax exemption In this budget, the Finance Minister has also proposed that the businesses would be incentivized by providing investment linked tax exemptions rather than profit linked exemptions. Investment linked tax incentives is to be provided to the business of laying and operating cross country natural gas or crude or petroleum oil pipeline network for distribution on common carrier principle. Under this method, all the
The pipeline projects in oil and gas sector to be incentivized by investment linked tax exemption will prove favorable to dominant players GAIL
6th July, 2009
FOR PRIVATE CIRCULATION
7
capital expenditure, other than the expenditure on land, goodwill and financial instruments would be fully allowable as deduction. GAIL, being the dominant player in gas distribution business is expected to be profited from this policy as the operational cost is anticipated to decrease leading to higher operational margin.
Tax Proposals Deduction on various taxes on petroleum products will boost the operational margin of refining companies like IOCL, HPCL, RIL • The ad valorem component of excise duty of 6% on petrol intended for sale with a brand name has been converted into a specific rate. Consequently, such petrol would now attract total excise duty of Rs 14.50 per litre instead of 6% + Rs 13 per litre • The ad valorem component of excise duty of 6% on diesel intended for sale with a brand name has been converted into a specific rate. Consequently, such diesel would now attract total excise duty of Rs 4.75 per litre instead of 6% + Rs.3.25 per litre • • Customs duty on bio-diesel has been reduced from 7.5% to 2.5% Duty paid High Speed Diesel (HSD) blended with up to 20% bio-diesel has been fully exempted from excise duties • • Excise duty on naphtha has been reduced to 14% Increase in MAT rate from 10% to 15%
The taxes imposed on various petroleum products dampen the margin of the refining companies. Thus, the reductions of such duties on various products would enhance the operational margin of companies like IOCL, BPCL and HPCL. The propose increase in MAT rate from 10% to 15% is expected to negatively impact private players like RIL and Essar Oil
IT & Telecom
CVD exemption on packaged software will help the IT companies in easier valuation CVD exemption to be provided on packaged software The IT industry had indicated that it is facing difficulties in the assessment of software which involves transfer of the right to use after the levy of service tax on IT software service. To resolve this issue, Finance Minister has proposed the exemption of CVD on packaged or canned software which would be provided on the portion of the value which represents the consideration for transfer of the right to use such software, subject to specified conditions. National Web Portal for employer and employee to be launched Finance Minister has also proposed the launch of a new project for modernization of
6th July, 2009
FOR PRIVATE CIRCULATION
8
the Employment Exchanges in public private partnership so that a job seeker can register online from anywhere and approach any employment exchange. Under the project, a national web portal with common software will be developed. This will contain all the data regarding availability of skilled persons and requirements of skilled persons by the industry. It will help youth in getting jobs and enable the industry to procure required skills on real time basis. Thus, IT companies like TCS, Wipro and Infosys will not only get opportunity to develop such web development project but also expect to gets its maintenance project later on adding to their revenues. Government expenditure of Rs 120cr on UIDAI will be an opportunity for top players like Infosys, Wipro, TCS and Mahindra Satyam for implementing a project of national importance Government to spend Rs 120cr on Unique ID cards The setting up of the Unique Identification Authority of India (UIDAI) is a major step in improving governance with regard to delivery of public services. The top private sector talent in India like Infosys, Wipro, TCS and Mahindra Satyam is expected to step forward to take the responsibility for implementing projects of vital national importance. The UIDAI will set up an online data base with identity and biometric details of Indian residents and provide enrolment and verification services across the country. The first set of unique identity numbers is expected to be rolled out in 12-18 months and the proposed provision of Rs 120cr has been made for this project.
6th th April, 2009 28 July, 2009
FOR PRIVATE CIRCULATION
9
Disclaimer This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Parsoli Corporation Limited has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval or notification. Parsoli Corporation Limited, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of Parsoli Corporation Limited. The views expressed are those of the analyst and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither the Company, nor its directors, employees, agents nor representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
6th July, 2009
FOR PRIVATE CIRCULATION
10