Union Budget 2012 - 13 Review

Nidhi Kedia || Research Analyst ||[email protected]

March 19, 2012

Union Budget 2012-13 Review

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Detailed Sectoral Review

Fiscal Consolidation???

Key Budget Incentives

Topics

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Topics

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• The Fiscal deficit of the Government for FY12 came in at 5.9% as against the budgeted

target of 4.6%. This was primarily caused by a fall in tax revenue collections and an

increase in subsidy bill combined with the shortfall in the divestment targets

• Given the fiscal slippage in FY12, the path of fiscal consolidation has been adversely

affected. However, no substantial reforms to boost the economic growth have been

announced in the budget. The Budget 2012-13 has failed to make the much required

attempt to foster growth by reviving fiscal consolidation.

• The Government has budgeted a fiscal deficit target of 5.1% in FY13. It will achieve this

target by raising its sources of revenue with an increase in excise duty and service tax

across the board. However, its targeted expenditure still remains high. Thus any slippage

in its revenue collection or increase in subsidies would make it difficult to achieve the

targeted fiscal deficit of 5.1% in FY13

• Some of its move to raise the excise duty and service tax combined with the recent

increment in railway freight charges are broadly inflationary. This in turn would

pressurize the Central Bank not to reduce the interest rates which in turn would make a

toll on the economic growth.

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What the budget failed to do?

• No timeline announced for the implementation of tax reforms, the Goods and Services

Tax (GST) and the Direct Tax Code (DTC)

• No hike in the foreign direct investment (FDI) limit in some of the sectors like aviation,

insurance and retail

• Failure to contain the market borrowings at the current level.

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Topics

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• Benefit to the individual tax payer

• Exemption limit for the general category of individual taxpayers enhanced from

Rs.1,80,000 to Rs.2,00,000 giving tax relief of Rs.2,000

• Deduction of up to Rs. 10000from interest from Savings Bank Account

• The 20% tax slab raised from Rs. 8,00,000 to Rs. 10,00,000 resulting in a tax

savings of Rs. 20,000 to the higher income group.

• Deduction of upto Rs.5,000 for preventive health check up

• Introduction of Rajiv Gandhi Equity Savings Scheme for a 50% income tax

deduction to new retail investors, who invest up to Rs. 50,000 directly in equities

and whose annual income is below Rs. 10 lakh.

• Central Excise and Service Tax being harmonized

• Standard rate of excise duty and service tax raised from 10% to 12%

• Service tax levy on all goods except those on the negative list comprising 17 heads

(by and large all service provided by the Government or local authorities)

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• Capital Market Incentives

• Reduction in Securities Transaction Tax (STT) by 20% from 0.125% to 0.1% on

cash delivery transactions

• Introduction of Rajiv Gandhi Equity Savings Scheme for a 50% income tax

deduction to new retail investors to generate additional flow of funds to the equity

markets

• Steps to attract foreign inflows by allowing qualified financial institutions (QFIs) to

access the Indian bond market

• Move to encourage corporates in raising finances abroad

• Rate of withholding tax on interest payments on ECBs reduced from 20% to 5% for

3 years for certain sectors viz Infrastructure, Real Estate, Power sectors

• Allowed ECB to part finance project costs

• Subsidies

• Endeavour to keep subsides under 2% of GDP in FY13. Further bringing it down to

1.75% in FY15

• ‘Food security’ to be fully covered by the Government.

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Topics

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Automobile sector Negative

SOURCE: Capitaline, BMA Research

Announcement Impact Comments

Basic Excise duty hiked to 12 percent from 10

percent

The rise in the excise duty would result in price hikes

across all the segments in the passenger car

industry, which consecutively would dent the demand

by some extent

Marginally negative for two wheelers, four

wheelers and Auto ancillary companies as

the increase was on expected lines

Excise duty on large cars increased from 22

percent to 24 percent

Duty on cars attracting mixed rate of (22% +

Rs 15,000) increased to an ad valorem rate of

27%

Excise duty on specified parts of hybrid

vehicles reduced from 10% to 6%

This would promote the manufacture, sale and usage

of such vehicles in India

Positive for the manufacturers of hybrid

vehicles like Mahindra & Mahindra

Basic custom duty on imported large cars/

MUVs/SUVs whose value exceeds USD 40,000

per vehicle increased to 75% from 60%

The rise in custom duty on imported completely built

units of large cars and SUVs will lead to a

considerable rise in prices of luxury cars and UVs

Negative for MNC car players as well as

domestic players like M&M and Tata Motors

Rs 10,000 is to be charged on building of

commercial vehicle chassis in addition to the

applicable ad valorem duty of 3%

This would increase the cost of production thereby

affecting margins

Negative for Tata Motors, Ashok Leyland

and Auto Ancillary companies

Increase in income tax exemption limit from

Rs. 180,000 to Rs. 200,000

Demand for two wheeler & lower end four wheeler to

be impacted positively with an increase in disposable

income

Positive for Hero Motor Corp, Bajaj Auto,

TVS Motors, Maruti Suzuki, etc

Hike in customs duty on bicycles from 10% to

30% and on bicycle parts from 10% to 20%

This would increase the competitiveness of domestic

bicycle manufacturers

Positive for Tube Investments

200% weighted deduction on in-house R&D

extended for a further period of five years

This will incentivize investment in R&D and

encourage new drug development

Positive for all auto companies.

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Automobile sector Negative



Interest subvention schemes on short-term

crop loans continued at 7% for another one

year. Further, additional subvention of 3%

will be available for prompt payment

Continuation of interest subvention scheme would

lead to higher farm income with small farmers and

thereby push the demand for mid-size and small

tractors

Positive for auto companies having a rural

presence, such as M&M and Hero Honda

Allocation of Rs. 25,360 crore for NHDP

proposal

Aggressive investments towards infrastructure

development would drive the demand for M&HC

Vehicles

Positive for MHCV players like Tata Motors,

ALL, Eicher Motors

Tax on repatriation of dividends from foreign

subsidiaries allowed at a lower tax rate of

15% as against 30% for one more year

Players having their profit making foreign subdiaries,

which distribute profits to their holding companies in

India will be benefited from this provision

Positive for companies like Apollo Tyres,

Tata Motors, Mothersun Sumi

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Banking & Financial Services sector Positive



Recapitalization of PSU Banks, RRBs and

other financial institutions to the tune of Rs

15,888 crore

Capital infusion would help banks in regulatory

compliance and fund business growth

Positive for PSU banks like SBI, IOB, UBI,

BOI etc

Interest subvention schemes on short-term

crop loans continued at 7% for another one

year. Further, additional subvention of 3%

will be available for prompt payment

This is likely improve the payment discipline in the

agri segment, which has seen a sharp rise in the

NPAs. It will also increase the demand for farm loans

Neutral to positive for PSU banks

Saving Bank interest deductible up to

Rs10,000

This is likely to improve the savings bank deposits for

the banks

Positive for the overall banking sector

Government borrowings marked at Rs 4.79

lakh crore (net)

Since market borrowings will be higher than the

FY2012 borrowings it will add pressure to bond yields

Negative for overall banking sector

Reduction in withholding tax on interest

payment on ECBs from 20% to 5%

This will raise demand for low cost funds from some

stressed infrastructure sectors

Positive for the infrastructure finance

companies like IDFC, REC and PFC.

Rise in overall limit of issuance of tax free

bonds from Rs. 30000 crore last year to Rs.

60000 crore

Financial Institutions to benefit from cost effective

funding avenues

Positive for financial institutions such as

NHAI, IRFC, IIFCL, HUDCO, NHB and

SIDBI

Introduction of Rajiv Gandhi Equity Savings

Scheme for a 50% income tax deduction

This will increase the retail participation in equity

market and improve the depth of the domestic

capital market

Positive for the financial services sector

Reduction in STT from 0.125 percent to 0.1

percent on cash delivery transactions

This will have a positive impact on the investors and

increase volumes in the equity market

Positive for all brokerage companies

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Capital Goods sector Positive



Increased spending on major infrastructure

projects

Higher allocation will result in all-round growth for the

sector as it will encourage more capital investment

Positive for the entire sector

Increased allocation to Defence at Rs.

193,407 crore

It will revive demand for the sector Positive for BEL, M&M, Tata Motors,

Pipavav Shipyard, BEML, L&T etc

Capital investment in sectors such as

fertilizers, telecom towers and oil and gas

has been made eligible for viability gap

funding

Would help in attracting private investment in PPP

projects. Steps to ease funding constraints in new

project investments would help revive the asset

creation cycle through order inflows, thus benefiting

the sector

Power sector to issue tax-free bonds worth

Rs. 10,000cr for financing projects; ECBs to

part finance rupee debt of power projects;

Customs duty on imported coal to be waived

off

These reforms will boost investment in the power and

infrastructure sectors, resulting in a surge in orders

for the capital goods segment


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Cement sector Positive



Excise duty on cement cleared from mini

cement plants in packaged form will be 6%

plus Rs. 120/tonne; while duty on cement

cleared from other than mini cement plant

will be 12% along plus Rs. 120/tonne. The

duty will be charged on the retail selling price

with an abatement of 30%

Largely neutral as the duty hike was already

anticipated

Neutral on cement manufacturers

Customs duty on coal has been exempted Marginal reduction in the input cost Positive for the cement players like India

Cements, Madras Cement and UltraTech

Cements

Various initiatives like interest subvention of

1% and allowing ECB for low cost affordable

housing projects

The continued focus of the government on affordable

housing will lead to volume growth for cement

companies

Positive for the industry as a whole

Allocation towards PMGSY has been

increased by 20% to Rs. 24,000 crore

Increased allocation towards infrastructure projects is

positive for the cement players


Allocation for Road Transport and Highways

for road development increased by 14% to

Rs. 25,360 crore

Increased allocation towards infrastructure projects is

positive for the cement players


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FMCG sector Neutral



Increase in standard excise duty from 10% to

12%

Minimal impact as most FMCG companies have low

single-digit excise payouts as their facilities are

located in excise-free zones

Negative for HUL and Asian Paints as a

higher proportion of their sales come from

excisable facilities

Increase in allocation to NRLM by over 34 per

cent to Rs. 3,915 crore and to Employment

Generation programme by 23 per cent to Rs.

1,276 crore

This will lead to an increased demand for FMCG

products from the rural population

Positive for FMCG companies whose 30-

50% of total revenues comes from rural

India

Tax on repatriation of dividends from foreign

subsidiaries allowed at a lower tax rate of

15% as against 30% for one more year

Players having their profit making foreign subdiaries,

which distribute profits to their holding companies in

India will be benefited from this provision

Positive for FMCG companies, which

receive dividend from their foreign

subsidiaries

Increase in Tax Slabs

Higher disposable income in the hands of consumers

will be positive to FMCG and consumer durable

industry


Customs duty on titanium dioxide reduced to

7.5% from 10%

It will improve the operating margins of the paint

industry as the raw material is imported

Positive for Asian Paints, Berger Paints,

Kansai Nerolac, Akzo Nobel etc

Increase of excise duty by 10% on cigarettes

This will result in an increase in duty. However,

players with strong pricing power can pass on the

duty hike through further price hikes in its cigarette

portfolio

Neutral for the players like ITC, VST

Industries, Godfrey Phillips

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Construction & Infrastructure sector Positive



Allocation to tax free bond for financing

infrastructure projects doubled from Rs.

30,000 crore to Rs. 60,000 crore

This will help in meeting the long-term needs of the

sector and will boost infrastructure development in

railways, ports, housing and highways development

Positive for the entire infrastructure sector.

Infrastructure spending to go up to Rs 50

lakh crore during 12th period five year plan

This will result in larger number of new orders getting

announced resulting in a robust order book of the

construction companies

Positive for the entire infrastructure sector.

L&T to be the major beneficiary

VGF scheme extended to irrigation, capital

investment in fertiliser sector, oil and gas

pipelines, telecommunication towers etc

It will push large projects under these sectors and will

help in attracting higher private investment into the

sector

Positive for Ramky Infra, IVRCL, RCF,

Chambal fertilizer, GAIL, Bharti Airtel, IDEA,

GTL Infra etc

Boost infrastructure development in railways,

ports, housing and highways development

Better highways would aid efficient and timely

delivery of cargo for road logistics Players

Positive for IL&FS Transport, IRB Infra,

IVRCL Infra, etc

ECB for capital expenditure on the

maintenance and operations of toll systems

for roads and highways

This move will encourage public private partnerships

in road construction projects

Positive for IL&FS Transport, IRB Infra,L&T,

NCC,etc

Increase in allocation by 13% of Rs. 14,242

crore to AIBP; Further focus to mobilize

funds, in Irrigation and Water Resources;

Allocation of Rs. 14000 crore towards rural

drinking water and sanitation; 20% increase

in allocation to PMGSY to Rs24,000 crore

This will help in building the rural infrastructure and

will be beneficial for the entire construction sector

Positive for companies like Pratibha

Industries, Unity Infra, Ramky, IVRCL,

NCC, SPML Infra, etc

Reduction in the rate of withholding tax on

interest payments on ECBs from 20% to 5%

for three years in sectors like power; airlines;

roads & bridges; ports and shipyards;

affordable housing; fertilisers; and dams

Will lower the interest outgo on ECBs thus effectively

reducing the cost of debts


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Real Estate sector Positive



Allowed to raise money through ECBs for low

cost affordable housing projects

Easier access to funds at a lower rate of interest Positive for Parsvnath, Puravankara, Sobha

Developers and other Small developers

Reduction in withholding tax on interest

payments on ECBs from 20% to 5% for three

years for affordable housing

This should lower the borrowing cost of developers

raising money through ECBs for the construction of

affordable houses

Service tax rate increased from 10% to 12% This would result in an increase in the cost to the end

user as the cost of development will go up

Negative for the entire sector

Extension of 1% interest subvention on

housing loan upto Rs 15 lacs where the cost

of the house does not exceed Rs 25 lacs

Such incentives would spur up the demand for

residential projects and continue to benefit

developers having low-cost affordable housing

projects

Positive for all realty companies catering to

this segment, mainly in tier II and III cities

Increase in the investment-linked deduction

of capital expenditure on low-cost housing to

150% from 100%

This would help stimulate more investments in the

mass housing segment

Increase in income-tax slab Higher disposable income in the hands of consumers

will lead to increased demand for the entire sector


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Oil & Gas sector Negative



Increase in cess on Crude petroleum oil

produced in India from Rs. 2500/ metric tonne

to Rs 4500/ metric tonne

Will increase the cost of production, thereby

impacting margins

Negative for Oil Exploring companies like

Cairn India, Reliance, ONGC, Oil India etc

Estimated fuel subsidy for FY2013 set at Rs.

43,580 crore as against 50% of the total

under-recoveries earlier

The subsidy estimate of Rs43,580 crore (for

government) could be less than 50% of the total

under-recoveries in FY2013. Hence it may increase

the burden of the PSU upstream companies and also

affect marginally the OMCs

Negative for the PSU upstream companies

like ONGC, Oil India and Gail

Oil & Gas pipeline infrastructure eligible for

“viability gap funding”

The proposal would act like a catalyst thereby

increasing investments into the pipeline infrastructure

Positive for GAIL, GSPL, IGL

Removal of 5 per cent custom duty on LNG

imports

This will benefit importers of LNG including power,

sponge iron and fertilizer Companies

Marginally Positive for Petronet LNG, Gail

etc

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Pharmaceuticals sector Positive



Increase in Service tax from 10% to 12% This would make the healthcare services more

costlier

Negative for the entire sector

200% weighted reduction in in-house R&D

extended for a further period of five years

This will incentivize investment in R&D and

encourage new drug development

Positive for Dr. Reddy’s, Biocon, SPARC,

Piramal Life, Sciences, Ranbaxy

MAT announced for partnership units Negative for companies that have partnership unit, as

it would result in higher tax outflow

Negative for Sunpharma, Cadila Healthcare

Allocation for NRHM proposed to be

increased from by 15% to Rs. 20,822cr

This will strengthen the rural health infrastructure Positive for all pharmaceutical companies

Exemption from income tax of upto Rs. 5,000

spent on preventive health check-up

Exemption for check-up expense will help healthcare

services

Positive for all pharmaceutical companies

Proposal to continue to allow repatriation of

dividends from foreign subsidiaries of Indian

companies at a lower tax rate of 15% up to

March 2013

Most of the frontline players have their profit making

foreign subsidiaries, which distribute profits to their

holding companies in India. These companies will be

benefited from this provision

Positive for all pharmaceutical companies,

mainly Indian companies, as they generate

the highest revenue from export markets

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Utilities sector Positive



Waiver of basic custom duty on coal This will benefit the companies with imported coal

based projects

Positive for NTPC, Adani Power, Tata

Power, JSW Energy, GMR Infra, GVK

Power and NPCIL

Allowing External Commercial Borrowings

(ECB) to part finance Rupee debt of existing

power projects and cut in withholding tax on

ECBs

The private and public power producers can avail

benefit of comparatively cheaper ECB loans to

reduce overall financing costs

Positive for the sector

Sunset clause for claiming 100% deduction of

profits for 10 years extended by another one

year

The extension of 80IA sunset clause offers

opportunity for power developers to commission

power plants in the next year and avail the benefit.

The benefit of 20% additional depreciation to benefit

power producers with competitive based power

projects

Positive for the sector

CIL advised to sign fuel supply agreements,

with power plants that have entered into

long-term PPAs with DISCOMs and would get

commissioned on or before March 31, 2015

It brings comfort of fuel availability for independent

power producers

Positive for companies like CESC, Lanco

Infra, Reliance Power, Adani Power,

Indiabulls Power ,NTPC

Exemption of Custom duty on plant and

equipment required to set up solar thermal

projects and a concessional CVD of 1% to

steam coal for a period of two years till March

2014; full customs duty exemption for natural

gas and LNG

Positive impact on the sector struggling due to high

prices of imported fuel


Tax free bonds of Rs. 10000 crore to be

allowed for financing Power sector in 2012-13

It would help to improve funding for the sector Positive for the whole power sector

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Nidhi Kedia || Research Analyst ||[email protected]

March 19, 2012

Union Budget 2012 - 13 Review

Business

Transcript of Union Budget 2012 - 13 Review