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India Budget: Mostly Good and Green
March 2, 2010

Our views on the Union budget for 2010-2011.


Author : iFAST Research Team



Untitled Document

The budget that was presented by the Finance minister (FM) Pranab Mukherjee on 26th February 2010.  In the run up to the budget, the markets were concerned about the level of fiscal deficit and the related funding of the deficit, future road map for reduction of deficit, withdrawal of fiscal stimulus, introduction of Goods & Service Tax (GST) and Direct Tax Code (DTC).

The FM presented a budget that has more or less covered the market expectations by easing off the stimuli within expectations, encouraging consumption-led growth by leaving more income in the hands of tax payers and setting targets for reduced deficits in the next two fiscals. The markets cheered the budget with the SENSEX closing higher by 175 points. The expenditure outlay for the Infrastructure sector, especially, has heartened as it continues to be critical to the country’s growth.

Here are the key budget highlights.

Fiscal Deficit Consolidation and Improvement
  • Based on budget estimates, the fiscal deficit for FY 2010-11 is at 5.5% of GDP, which works out to Rs.3,81,408 crore
  • The actual net market borrowing of the Government in 2010-11 would be of around Rs.3,45,010 crore
  • Fiscal deficit targets for FY 2011-12 and FY 2012-13 are pegged at 4.8 % and 4.1 % respectively
  • For FY 2008-09, the cumulative fiscal deficit including fertilizer and oil bonds were at 7.8% of the GDP and for FY 2009-10 at 6.9%
  • Conscious effort made by the finance ministry to avoid issuing bonds to oil and fertilizer companies
  • Plans to raise 25,000+ crores through disinvestment of stake in Government owned companies

The budget deficit is in line with the market expectations. Any higher level of deficit would have negatively impacted the market. Also, the government has come out with a road map to reduce the deficit in the next two fiscal years, indicating the government’s seriousness to tackle the deficit issue. We believe that with the government’s high growth target for the economy, the growing GDP, disinvestment and 3G auctions will help in reducing the level of deficit going forward. 


Direct Taxes
  • The new personal income tax slabs have been increased

Men

Women

Senior Citizens

Income upto Rs.1.6 lakh

Nil

Income upto Rs.1.9 lakh

Nil

Income upto Rs.2.4 lakh

Nil

From Rs. 1,60,000 – 5,00,000

10%

From Rs. 1,90,000 – 5,00,000

10%

From Rs. 2,40,000 – 5,00,000

10%

From Rs. 5,00,000 – 8,00,000

20%

From Rs. 5,00,000 – 8,00,000

20%

From Rs. 5,00,000 – 8,00,000

20%

Income above Rs.8,00,000

30%

Income above Rs.8,00,000

30%

Income above Rs.8,00,000

30%

  • Deduction of an additional amount of Rs. 20,000 allowed, over and above the existing limit of Rs.1 lakh on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government
  • Current surcharge of 10 per cent on domestic companies reduced to 7.5 per cent.
  • Rate of Minimum Alternate Tax (MAT) increased from the current rate of 15 per cent to 18 per cent of book profits.
  • Benefit of investment linked deduction under the Act extended to new hotels of two-star category and above anywhere in India to boost investment in the tourism sector.

The direct tax statement by the FM has come as a boon to the individual tax payers. The FM has increased the slabs for taxes which will put more money into the hands of the individual tax payer. Also, the government proposes an additional deduction of Rs. 20,000 apart from Rs. 1 lac under 80 C, wherein the Rs. 20,000 will be invested into the infrastructure bonds as notified by the central government. This benefits both the tax payer and infrastructure projects. With this budget, the tax payer can save an additional amount of maximum of Rs. 57,000 in tax payments.

 However, companies mostly from the service industry will be paying higher taxes on account of MAT.


Indirect Taxes
  • The standard excise duty rate on all non-petroleum products enhanced from 8% to 10%
  • The excise duty on large cars, multi-utility vehicles and sports-utility vehicles increased by 2 percentage points to 22%
  • The specific rates of duty applicable to portland cement and cement clinker also adjusted upwards by 25%
  • Restore the basic duty of 5% on crude petroleum; 7.5% on diesel and petrol and 10% on other refined products. Central Excise duty on petrol and diesel enhanced by Re.1 per litre each.
  • Increase in duties on gold and platinum from Rs.200 per 10 grams to Rs.300 per 10 grams and on silver from Rs.1,000 per kg to Rs.1,500 per kg.
  • Rate of tax on services retained at 10 per cent to pave the way forward for the Goods and Services Tax (GST).

 With the diesel rising by Rs 2.58 and the Petrol rising by Rs. 2.67, this will no doubt lead to an inflation spillover effect; higher fuel prices will fan price increases for other goods, and with food prices already high, the double whammy will lead to higher levels of inflation than the present. This will prompt RBI to raise the interest rates, which will affect the economic growth.

 Both, the increase in the excise duties and the petroleum prices can be seen as a move to ease stimulus. While the market was expecting increases in excise duties, the market wasn’t expecting the duties on petroleum products to increase in the budget. It was widely expected that the hike in fuel prices would be handled under the Kirit Parikh committee recommendations.

 Moreover, the implementation of the Kirit Parikh committee recommendations would have helped the oil marketing companies without helping the reduction in the deficit. So by increasing the duties on petroleum products, the government has chosen the lesser evil for the time being and further if the government decides to implement the Kirit Parekh Committee, fuel prices will be hiked even more.

Also, gold and precious metals have become costlier.

 The hike in excise duty on the other goods listed was expected by many and the rate of the hike is within expectation. It is expected that most companies would pass on the hike to the consumers.

 In the GST regime, both the excise and service tax rates will be at 10%. So as a precursor to the implementation of the GST tax regime, the FM has kept both the service tax and standard excise duty (on goods other than those listed) at 10%.



Tax Reforms
  • Government to introduce the Direct Tax Code (DTC) from April 1, 2011
  • Government to also introduce the Goods and Services Tax (GST) from April 1, 2011

 Both the tax reforms aim at eradicating overlapping taxes and simplifying the taxation structure.

 The industry has been awaiting the implementation of the GST. However, the DTC will likely change the current direct taxation rules significantly. How much the DTC benefits the tax payers will only be clearer once it has been presented to the parliament for approval.


Infrastructure Sector
  • Project import status to 'Monorail projects for urban transport' at a concessional basic duty of 5 per cent
  • Full exemption from import duty is available to specified machinery for road construction projects on the condition that the machinery shall not be sold or disposed of for a minimum period of five years.
  • The FM has provided Rs.1,73,552 crore, which accounts for over 46 per cent of the total plan allocations, for infrastructure development in the country.
  • The FM has raised the allocation of road transport by over 13 per cent from Rs.17,520 crore to Rs.19,894 crore.
  • Rs 16,752 crore provided for Railways, which is about Rs.950 crore more than last year

 Infrastructure has been provided with a major push in this budget and actions speak greater than words. The FM has allocated 46% of the total planned allocation into infrastructure sector. Even individuals will get additional deduction in their taxable incomes if they invest Rs.20,000 into the government’s infrastructure bonds.

A host of duty concessions have been given to infrastructure relating to agriculture produce, right from warehousing, transportation of food grains, creating cold supply chains and machines handling food grain produce at mandis.


Banking and Financial Services Sector
  • An apex level Financial Stability and Development Council to be set up with a view to strengthen and institutionalise the mechanism for maintaining financial stability
  • RBI is considering giving some additional banking licenses to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.
  • Rs.16,500 crore provided to ensure that the Public Sector Banks are able to attain a minimum 8% Tier-I capital by March 31, 2011.
  • To encourage the people from the unorganised sector to voluntarily save for their retirement, the Government will contribute Rs.1,000 per year to each New Pension Scheme (NPS) account opened in the year 2010-11. This initiative, "Swavalamban" will be available for persons who join NPS, with a minimum contribution of Rs.1,000 and a maximum contribution of Rs.12,000 per annum during the financial year 2010-11

An apex body to look into the level of financial stability is very much needed to avoid the situation that the US went through in 2008. The need for such a body in India cannot be pushed aside; different market segments have different regulators, and with the presence of participants operating across segments (for example, ICICI Bank, ICICI Securities, ICICI Prudential MF, ICICI Prudential Life Insurance) there is a real risk of any participant becoming “too big to fail” and can lead to disastrous results not only for India but for the whole world.

The proposal of RBI to give new licenses for Non Banking Financial Companies (NBFCs), although unexpected, is good for the banking industry as such a move will increase the level of financial inclusion and the level of competition.

Green Energy Initiatives
  • Central Excise duty is being reduced from 8% to 4% on LED lights, at par with Compact Fluorescent Lamps (CFLs).
  • The FM proposes to exempt a few more specified inputs required for the manufacture of rotor blades for wind energy generators from Central Excise duty.
  • To provide a concessional customs duty of 5% to machinery, instruments, equipment and appliances, etc., required for the initial setting up of photovoltaic and solar thermal power generating units and also propose to exempt them from Central Excise duty.
  • An ambitious target of 20,000 MW of solar power by the year 2022 has been set under the mission.
  • A clean energy cess on coal produced in India at a nominal rate of Rs.50 per tonne. This cess will also apply to imported coal.
  • It is proposed to set up solar, small hydro and micro power projects at a cost of about Rs.500 crore in Ladakh in Jammu & Kashmir
The FM has provided with a host of incentives for the production of green energy, with a clear thrust on solar energy and India is one of the few countries that can benefit the maximum from solar energy. A Rs. 50 energy cess on domestic as well as imported coal is also a good measure and proceeds can be used for activities that will increase the green cover.

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iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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