Budget 2013: Balanced Act?

While a mention of the GST guidelines was made,no timeline was announced,which disappointed some observers. The disposable income of the larger block of population is not affected ,however,the 10%surcharge levied on individuals with income of more than R1 crore,may impact the demand of high end and luxury products. In that context,even the increased import duties on luxury cars and motorcycles are seen abating a portion of the demand.

For corporate India,a similar surcharge of 10% from 5% on domestic companies and 5% from an earlier 2% on MNCs would bring down the earnings by a similar extend for the fiscal 2014. However,what appears to have instigated an apparent reaction is the proposed hike in the withholding tax on royalty and fees for technical services from an earlier 10% to 25%,subject to Double Tax Avoidance Agreement (DTAA).

The thrust on rural spending continued with expansion of MGNREGA while key steps were taken to support the Infra sectors. The allowance of 15% investment incentive over and above depreciation rates for companies investing more than R100 crores in plants and machinery is seen as a step that could lead to higher private sector participation in improving the investment cycle. The budget allocated R14,000 crore for capital infusion in public sector banks. However,there are doubts whether this would suffice to keep all banks\’ capital adequacy ratio around the regulatory mandate. The extension of interest subvention scheme on farm loans from PSBs to private sector banks raised concerns of greater levels of NPAs for private banks.

Certain announcements to revive retail investors\’ interest in the capital market including reduction in the securities transaction tax for mutual funds,expansion of the scope of Rajiv Gandhi Equity Savings Scheme were deemed positives. However,what spooked the street to pull back the benchmark S & P Sensex by nearly 300 points to sub- 9000 level is the confusion with a proposal stating a tax residency certificate “shall be necessary but not a sufficient condition” to take advantage of double taxation avoidance agreements with countries like Mauritius.

Automobiles

Amidst slowing demand and rising fuel prices,the street did not expect major announcements for the sector other than additional excise duty on diesel powered passenger vehicles. While such a declaration did not come through,the FM tried to bank on improving demand of sports utility vehicles (SUVs),which are largely diesel driven,and luxury cars. Import duty on luxury cars has been increased to 100% from the earlier 75%,while it has been hiked to 75% on motorcycles (800 cc and above) from 60%. The non-taxi SUVs would attract a higher excise duty of 30% instead of the earlier 27%. The major auto stocks showed a strong negative reaction to these announcements. However,towards the end,Tata Motors and Bajaj Auto recovered. Maruti stayed in the red as traders reacted to the announcement of higher tax rate of 25% on the royalty payments to be made to the parent company compared to 10% earlier.

Banking & Financial

The Budget has allocated ‘14,000 crore for capital infusion in public sector banks. While it is higher than the ‘ 12,000 crore set aside in 2012-13,there are doubts whether this would suffice to keep all banks\’ capital adequacy ratio around the regulatory mandate. The interest subvention scheme on farm loans at 4% rate has been continued for PSBs and extended to private sector banks. The street considered these measures to have a negative bias on the sector. As a result,bluechip banking stocks were the biggest losers amongst Nifty constituents.

A unique step of the Budget was the proposal to set up an all women public sector bank by October,2013. This is expected to empower women and lead to greater financial inclusion.Banks will be permitted to act as insurance brokers. This will lead to larger distribution and greater penetration of insurance products.

Capital Goods

There were no specific announcements for this sector in the Union Budget.

However,broad measures for revival of investment like the 15% investment allowance over and above depreciation on investments greater than or equal to ‘100 crore in plant and machinery may lend a support.

While,the power equipment industry expected measures like anti-dumping duty on imported equipment or exemption of excise duty assuming them as deemed exports,they did not come through.

Anticipation of accelerated rate of depreciation from current 15-20% or excise duty exemptions on cement and steel used for mega power projects have also not been met in this Budget.

Cement

While the excise duty on cement was expected to remain the same,there were predictions of increased allocation to the sector,which remained unfulfilled in the Union Budget. Further,the recently announced linking of freight charges revisions to fuel costs in the railway budget is expected to eat into the operating margins of cement producers who use the railways to,on an average,transport more than 30% of their orders or volumes.

Cement stocks like ACC and Ambuja were,however,hit by the budget announcement of an increased withholding tax on royalty payments to 25% from the earlier 10%,albeit subject to double tax treaty relief.

FMCG

The Union Budget for 2013-14 has brought respite to the Indian FMCG industry as the government continues to focus on rural India to spur consumer demand. The decision to extend interest subvention scheme for short-term crop loans,46% higher allocation for Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) to ‘33,000 crore are big positives that could put more money in rural pockets and improve the standard of living. This would,in turn,ensure continued rural demand.

The industry is also happy that the government is finally moving ahead with the introduction of Goods and Services Tax (GST) and the proposal for balance CST compensation to the states is a move in the right direction.

While the imposition of higher excise duty on cigarettes was expected,the extent is larger than anticipated. Excise duty has increased by 18% on all cigarettes except cigarettes of length not exceeding 65 mm. This is considered a negative for ITC.

JEWELLERY (RETAIL)

There were expectations that the FM may impose a tax on gold lending over and above the import duty hikes announced in the recent past for making gold less attractive in order to contain the distortion to India\’s fiscal deficit. In the absence of such announcements,stocks of retail jewellery producers stayed firm. To aid the export oriented industry,duty on pre-formed precious and semi-precious stones has been reduced from 10% to 2%.

The FM also proposed to levy 4% excise duty on silver manufactured from smelting zinc or lead. This will help bring the rate on par with the excise duty applicable to silver obtained from copper ores and concentrates.

The FM also relaxed the baggage rules for bringing jewelry into the country due to rising gold prices. He proposed to raise the duty-free limit to ‘50,000 in the case of a male passenger and ‘1,00,000 in the case of a female passenger.

INFRASTRUCTURE

The infrastructure sector has emerged as the biggest direct beneficiary of the budget announcement. The sector,which is in need of revival in investments,received some respite as the finance minister laid heavy emphasis on the sector,adding that infrastructure Debt Funds (IDF) will be encouraged. The Budget focused on investment based incentives instead of profit based measures. It is announced that companies investing ‘100 cr or more in plant and machinery between April 2013 and March 2015 will be entitled to deduct an investment allowance of 15 % of the investment,in addition to current rates of depreciation.He also raised the limit of tax-free bonds that help raise capital for some companies from ‘25,000 crore to ‘50,000 cr for 2013-14. India Infrastructure Finance Corporation Ltd (IIFCL),in partnership with the Asian Development Bank,is directed to offer credit enhancement to infrastructure companies that wish to access the bond market to tap long term funds.

Oil & Gas

The budget indicated review of the oil and gas exploration policy from a profit sharing model to revenue sharing contracts which some experts believe could lead to increased risk profile for exploration and production companies.

In terms of positive moves for the industry,the government outlined its commitment to introducing stability in natural gas pricing and framing policies to encourage exploration and production of shale gas besides clearing New Exploration Licensing Policy (NELP) blocks that were awarded but are stalled.

However,an increase in withholding tax rate for royalty and fee for technical services from 10% to 25% as well as increase in surcharge rates from 5% to 10% may increase overall cost for oil and gas companies.

Pharma & Healthcare

Directionally,the government showed its commitment towards the healthcare sector by increasing the spend on the National Health Mission by 24% over the revenue expenditure of last year.

The government has allocated ‘37,330 crore to the ministry of health and family welfare,while the new National Health Mission will get an allocation of ‘21,239 crore.

However,the increase in surcharge from 5 to 10% and increase in royalty rates of tax from 10 to 25% (subject to double tax treaty relief) will impact the pharma sector negatively. The excise duty on MRP basis (with abatement of 35%) for ayurvedic,unani,bio chemic,siddha and homeopath medicines,aligns these areas with the present regime for the pharma sector.

The budget has set aside ‘4,727 crore for medical education,training and research. Moreover,’150 crore has been provided for the National Programme for the Health Care of Elderly.

Utilities/power generation

On expected lines,the budget indicated that the tax holiday for power plants be extended to March 31,2014 from March 31,2013. The announcement of public private partnership (PPP) in the coal sector for higher coal production could be a major positive if implemented in an efficient manner. The budget emphasised on blending and pooled pricing in order to meet the coal requirement of active power plants till March 2015. The streamlining of customs duty and countervailing duty of steamed and bituminous coal imports at 2% each,may affect cost of power generation even as CVAD can be claimed back. To promote green energy,a number of measures were announced,including an allocation of ‘800 crore for reintroducing ‘generation-based incentive’ for wind energy projects. A provision of low interest financing from the National Clean Energy Fund (NCEF) to IREDA to on-lend to viable renewable energy projects was made.

Real Estate

In a bid to make housing more affordable,a slew of measures were announced in the Budget. An additional deduction of interest of up to 1 lakh has been announced on persons taking a loan for their first home from a bank or housing finance corporation up to ’25 lakh during March 2013 to February 2014.

Moreover,the government proposed setting of a fund for urban housing with a proposed fund of ‘2,000 crore in 2013-14. It also proposed to provide ‘6,000 crore to the Rural Housing Fund in 2013-14. However,luxury houses will become more expensive as the government reduced the rate of abatement from 75% to 70%. The government proposed to apply TDS at the rate of 1% on the value of the transfer of immovable property where the consideration exceeds ’50 lakh. However,agricultural land is exempted. Further,existing exemptions from service tax for low cost housing and single residential units will continue.

Metals & Mining

In order to increase the production of coal for supply to power producers and other consumers,a Public Private Partnership (PPP) policy framework is set to be devised,with Coal India Limited as one of the partners.

The FM indicated that the coal ministry is working on the policies and an announcement is expected soon. Duties on steam coal and bituminous coal will be equalised and 2% custom duty and 2% CVD levied on both kinds of coal. Post the announcement,the Coal India stock rallied as much as 3.8% before ending marginally lower.

While there were no major announcements for metal producers,the Budget introduced 4% excise duty on silver manufactured from smelting zinc or lead,to bring the rate on par with the excise duty applicable to silver obtained from copper ores and concentrates.

TEXTILES

The major positive coming out of the Union Budget for the textile sector is the exemption of excise duty on ready-made cotton garments. The budget envisages 2,400 crore on the Technology Upgradation Fund Scheme (TUFS) for the sector in 2013-14. Textile parks that have been set up under the Scheme for Integrated Textile Parks,would have apparel parks to house apparel manufacturing units.

The finance minister proposed to allocate ’50 crore to the ministry of textiles to provide an additional grant of upto ‘ 10 crore to each park. Since the handloom sector is in distress,FM proposed to provide working capital and term loans at an interest of 6%.

He also allocated an additional sum of ’96 crore in 2013-14 to the ministry of textiles for interest subvention. Due to lower production cost and abundant raw material base,India is the third largest apparel exporter.