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Monday, February 26, 2007

Great expectations


Besides addressing the inflation problem, the Budget is likely to focus on infrastructure and agriculture.

It is once again that time of the year when the focus of everyone—be it the common man or the industrialist--shifts from Mumbai to Delhi, from Dalal Street to the Parliament, as the Finance Minister unveils the Budget.

But this year’s Budget is going to be tough for Finance Minister P Chidambaram. The economy is growing at a scorching pace, but inflation levels are also hitting multi-year highs.

Thus, a balance between sustaining growth and controlling inflation is going to be a Herculean task. This is also evident from the behaviour of the market last week, which tanked by 723 points or 5 per cent as there is a growing concern how the finance minister would be able to balance both.

Though there are high expectations among industry players, sectors like automobiles, cement, infrastructure, power, banking, oil and gas, agro-based, textiles, sugar and paper are expected to be in focus.

“We broadly expect the government to deploy more money in agriculture and in the development of agriculture infrastructure,” says, Raamdeo Agrawal, managing director, Motilal Oswal Securities.

“Today, 65 per cent of the population is leaving in rural areas and most of them are directly and indirectly involved in agriculture business. With rising revenues, the government can afford to focus on the agriculture sector,” adds Dinesh Thakkar, CMD, Angel Broking.

Here is a closer look at what industries and analysts expect from the Union Budget 2007-08.

Automobiles
The industry demands rationalising excise duty of 16 per cent for all cars and not just small cars (at present all cars except small cars attract a duty of 24 per cent). However, this seems unlikely.

Industry players need more clarification on the definition of a small car as in the last Budget, it was defined both in terms of length (ie under 4,000 mm) and engine size (1,200 cc for petrol-1,500 cc for diesel), while the Auto Mission Plan has defined small cars only by length (under 3,800 mm).

Two- and three-wheeler players have been hankering for lowering the excise duty from the current 16 per cent to 8 per cent though analysts feel it is unlikely that the government would go the full length.

The extension of R&D tax benefits beyond March 31, 2007 is a strong possibility and will be a positive given the accelerated rate of product launch in a fiercely competitive market.

Key policy pronouncements could also be made regarding the macro environment in line with the Auto Mission Plan. The emphasis on auto parks and specially designated SEZs for automobiles reflected in the mission plan could see some fiscal sops on this front.

Concessions for exports of components, small cars and multi-utility vehicles and tractors could also be a key positive for volume growth. Some movement on the demand increase in the motor vehicle depreciation rate from 15 per cent to 25 per cent should also prove a key positive for industry.

The auto-ancillary segment too has its own wishlist of revising the abatement of parts and components at higher levels (currently 33.5 per cent) and maintaining customs duties at the present level.

A reduction in the peak customs duty on components from the current 12.5 per cent, which appears probable in the light of the government's resolve to move towards Asean rates, could mean that while OEMs could source cheaper imported components, domestic components makers would face increased competition especially from their east Asian peers.

Banking and finance
In order to ensure greater availability of resources to meet the rising demand for credit, analysts feel that the lock-in period of the investment in the term deposits eligible for tax deduction under section 80C may be reduced from five to three years.

There are expectations that the earlier 80L tax exemption on interest income may be restored and that the limit for tax deducted at source may be increased to Rs 10,000 from Rs 5,000.

Kotak Securities expects that perpetual non-cumulative and redeemable cumulative preference shares in Tier I and II capital respectively should be allowed in order to improve the capital adequacy ratio ahead of Basell II norms.

Cement, construction and infrastructure
With government donning its anti-inflation gear, the tight cement price situation has come under the scanner in recent times. However, little action is expected on this front as the import duty on cement was removed only last month.

The cement sector feels that it is highly taxed with excise alone equivalent to at least 32 per cent of the ex-factory price. Hence, the key industry demand is to reduce the specific excise duty of Rs 408 per tonne at present to Rs 250 per tonne. While it is unlikely that the government will meet the demand entirely, there could be some reduction given the government’s concerns over the price situation.

There is a strong likelihood of a reduction or even a phase-out of import duties of 10 per cent on pet coke-a key alternative to coal. There could also be cut in import duties on coal.

Other key expectations include a reduction of royalty on limestone, presently at Rs 45 per tonne, in line with other commodities and excise duty exemption for cement supplied to SEZs and a phase-out in the levy on captive power generation.

The strong focus on infrastructure could see some action on the customs duty front for construction equipment.

The key industry demand for increasing the proportion of Viable Gap Funding, which is a one-time or deferred grant, provided with the objective of making a project commercially viable, presently at 40 per cent could be increased, which will mean entry of more private players in infrastructure projects.

The other key demand is to extend tax benefits for infrastructure projects other than power and BOT projects (like pipelines) as also the exemption from application of minimum alternative tax applicable to infrastructure companies.

Fertilisers
The fertiliser sector is expecting simplification of rules for claiming duty exemption on input such as naphtha, fuel oil and ammonia. It also expects concessional duty of 5 per cent on import of urea to manufacture complex fertilisers.

FMCG
In the processed food and ready-to-eat food category, the industry is expecting the exemption of duty which is currently about 8 per cent.

The industry also demands a tax break and other incentives for setting up food processing industry in the form of 100 per cent tax deduction in first 10 years. The paints industry expects a cut of 2.5 per cent in the import duty on titanium dioxide, which is the single largest raw material.

There are expectations that cigarettes will come under the value added tax regime this year.

At present, there is a 4 per cent additional excise duty on cigarettes, which could be removed and VAT implemented. As long as the excise duty or VAT increases by up to 5 per cent, cigarette companies should be fine. But if the VAT rate is 12.5 per cent, it could affect cigarette volumes negatively.

Hospitality
The hotel industry expects the Budget to give it infrastructure status as that would entail hotel projects to attract a 10-year tax holiday.

Analysts expect the current 10 per cent rate of depreciation to be raised to 20 per cent, which will result in lower taxes for hotels.

In a drive toward rationalisation of service tax, Kotak Securities expects hotels to be exempted from paying service tax on services received from foreign tour operators and travel agents, whose services are received outside India.

There are expectations that the luxury tax is made uniform across all states, and that it should be charged on the actual billed amount. Emkay expects luxury tax to be capped at 10 per cent.

Information technology
Software exports from units located in SEZs are exempt from taxes for ten years in the following manner: for the first five years, 100 per cent of income from export, while for the next five years, 50 per cent of income from export is deductible from taxable income.

Software exports are also exempt from tax until FY09 under section 10A/10B, a provision, which the industry expects to be extended for another 10 years. However, analysts believe this may not come through.

The information technology (IT) industry expects the concessions given to software exports from special economic zones (SEZs) to be extended to software technology parks (STPs), as per Man Financial.

According to Sharekhan, if the tax exemption on STP units is not extended to SEZs, the effective tax rate is expected to increase to 18-24 per cent range, up from 11-17 per cent depending upon the proportion of income from exports and contribution from the domestic business. This would result in lower net margins to the extent of 150-300 basis points.

Kotak Securities expects an exemption of genuine business expenditure from the fringe benefit tax. The industry also expects a withdrawal of service tax on the maintenance or repair of software.

Media
Sharekhan expects a reduction of customs duty on import of capital goods in line with the reduction in peak customs duty, which is currently up to 36 per cent. This would be beneficial to the entire media industry as it would reduce set-up costs.

According to Kotak Securities, such a move would encourage growth of segments like digital exhibition, which would in turn reduce revenues losses incurred due to piracy and boost tax collections.

Man Financial expects the print media to come under the service tax net, in order to bring parity between print and electronic media, as the latter pays service tax on advertisement revenues of 12.24 per cent per cent tax.

The industry expects a reduction in excise duty levied on equipment like set-top boxes (STBs) from a normal rate of 16 per cent to nil, which would bring the rates applicable on broadcasting equipment on par with telecommunication equipment, and encourage domestic production of STBs.

Further, Kotak Securities expects a correction of this anomaly created last year as there was a reduction in customs duty from 15 per cent to nil on STBs but there was no corresponding reduction in import duties on inputs used in the manufacture of STBs.

Metals
Broking houses do not expect any significant measures for the industry as duties on many were recently reduced on January 23, 2007. Customs duty for most of the key metal products like aluminium, zinc, copper, tin and ferro-alloy stainless steel was reduced to 5 per cent from 7.5 per cent.

However, they expect reduction in the excise duty in general in order to rein in inflation. If the duty on on copper concentrate is reduced, copper manufacturers will do better.

Oil and Gas
In a bid to reduce fuel prices, the oil ministry is seeking cuts in taxes and duties levied on retail petroleum products as well as energy exploration.

Gas pipelines and exploration activities are expected to be granted an infrastructure status, which would entail them to income tax benefits.

Kotak Securities also expects a concession in service tax on companies offering drilling, surveying and offshore vessels services.

Add to this, a reduction in project import duty structure for infrastructure projects in petroleum sector would help curb inflation of project costs of refineries due to taxation, given the fact that petroleum product exports are the largest commodity exports from the country.

Further, the industry expects a rationalisation of customs duty structure, which currently varies across different petroleum products. A 5 per cent customs duty is levied on crude oil, 7.5 per cent on petrol and diesel, 10 per cent on air turbine fuel and 5 per cent on naphtha, at present.

Rationalisation of excise duty on petrol and diesel is sought as well, from a structure of a percentage of cost plus fixed rate to a specific duty of Rs 15.92 a litre for petrol and Rs 6.08 a litre for diesel, according to Kotak Securities.

Man Financial expects a cut in excise duty on naphtha and fuel oil from the current level of 16 per cent. Again, there is a scope for making the sales tax structure uniform at a rate of 4 per cent, which is up to 29 per cent for diesel and up to 20 per cent for petrol in a number of states at present.

Petrochemicals and chemicals
There is a possibility of a cut in import duties on purified terephthalic acid and mono ethylene glycol t o 5 per cent and that on polymer to reduce from the current 5 per cent.

Analysts also expect a cut in the excise duty on polymers (15 per cent now), fibre intermediaries (15 per cent) and polyester (currently at 8 per cent) to around 5-10 per cent.

As regards chemicals, analysts expect a review of the excise and customs duty of 16 per cent and 10 per cent respectively on caustic soda and soda ash.

Pharmaceuticals
One of the key demands of the sector includes reduction of MRP based excise from 16 per cent to 12 per cent and increase in abatement to 52 per cent. The latter seems unlikely as the government recently increased the abatement from 40 per cent to 42.5 per cent.

The extension of the income tax benefits on R&D expenditure (150 per cent weighted deduction) beyond March 2007 for another five years is a strong possibility.

Others demands include a reduction in customs duty on raw materials for molecules from the current 12.5 per cent to 5 per cent and tax concessions on milestone payments received on new chemical entity out-licensing.

Service tax exemption on clinical trials and other scientific services for foreign clients is also another demand if fulfilled which would boost domestic companies wanting to take advantage of the contract research opportunity. On the customs duties front, an exemption on life-saving drugs looks a strong possibility.

Power and engineering
Broking houses expect a lot from the Budget for the power sector. Emkay Shares and Stock Brokers feels that power equipment players will gain if duty on raw materials on power generation, transmission and distribution are reduced from the current 16 per cent to 14 per cent.

Kotak Securities expects duties on project imports to be reduced from 12.5 per cent to 7.5 per cent and the Accelerated Power Development and Reform Programme (APDRP) scheme to be continued.

Edelweiss Securities says that if the concessional zero customs duty structure is extended to transmission projects associated with mega power projects, power transmission players will benefit.

If the Budget provides infrastructure status to the power generation and distribution sector, power equipment players and even companies in the capital goods and engineering sectors will gain.

The engineering and capital goods industry, which was reeling under pressure of rising input costs, had benefited in the previous Budget as customs duty of major inputs like aluminium and copper had reduced.

Thus, broking houses don't expect any measures on this front except increased allocation of government spending on infrastructure, which is positive for the industry. Emkay Shares and Stock Brokers feels that excise duty on earth moving and construction equipment may be reduced from 16 per cent to 8 per cent.

Sugar
Depressed by supply and compressed by margins, the Indian sugar industry is expecting this Budget to announce some sweet initiatives.

Indian Sugar Mills Association (ISMA), the apex body representing the sugar industry, has proposed to reduce the excise duty on molasses and to be levied at 8 per cent of the selling price of the molasses.

Sugar companies pay excise duty on a fixed basis of Rs 750 per tonne of molasses, compared with the final prices of molasses at about Rs 1000 in some states.

Besides expectations of a quicker implementation of ethanol blending at 10 per cent in fuel, the industry wants ethanol to get infrastructure status.

Telecommunications
The telecom industry expects a rationalisation of license fee revenue sharing which varies from 6-10 per cent in different circles to a uniform rate of 6 per cent across the country. However, this is unlikely.

Analysts also expect an increase in service tax levied from telecom operators from the current level of 12 per cent. These changes however, may not impact the revenues of the operators, as they would be passed on to the consumer.

Mobile handsets attract an additional customs duty of 4 per cent at present, which the industry expects to be removed.

Textiles
In order to make the Indian textile industry more competitive in the global market, Kotak expects the deadline for Technology Upgradation Fund to be extended to March 2012 from the current March 2007.

It also recommends that the excise duty on man-made fibre to be reduced from 8 per cent to 4 per cent to bring parity with cotton yarn, and that on mono ethylene glycol (key input for man-made fibre) from 12 per cent to 8 per cent to make it the same as on purified terephthalic acid.