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Axis Bank
24-Feb-05229
1,019
1,302
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8-Jan-07625
826
1,100
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Grasim
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247
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446
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Investors Eye
February 29, 2008investors eyesharekhan budget special
Sharekhan Budget Special
Budget 2008-09: Populist yet growth oriented
Given the election year, the finance minister (FM) tabled apopulist budget aimed at pleasing a large section of ruralpopulation and also the salaried middle class. Apart fromthe substantial increase in budgetary allocation for ruraland social infrastructure, the budget has proposed hugedebt waiver and relief worth Rs60,000 crore to farmers.But in spite of the increased expenditure, the fiscalprudence has been maintained with fiscal deficit targetset at 2.5% for 2008-09.In fact, debt waivers and relief to farmers, enhanced ruralallocation and reduction in personal tax liability is expectedto increase the disposable income and boost overallconsumption demand in the economy. The implementationof sixth pay commission would further add to theconsumption boom. This is expected to revive the growthin consumer durables and goods sector, which was showinga distinct slowdown and also to sustain the growthmomentum in the economy. What's more important is thefact that the FM has also focused on controlling inflation byreducing peak excise duty rate. Moreover, the fiscal deficittarget of 2.5% (as against Fiscal Responsibility & BudgetManagement [FRBM] target of 3% for 2008-09) indicatesthat the government might reduce its borrowing and therebytarget the money supply in the economy to control inflation.The FM has not tinkered with the corporate tax. Thecontinued focus on spending on infrastructure andinitiatives taken to boost consumption could have a positiveimpact on corporate earnings. In fact, there could be someupgrade to the earning estimates of consumer drivencompanies such as automotive and fast moving consumergoods (FMCG). This makes it a well-balanced budget thatnot only woos the vote bank but also provides fiscal stimulusto sustain the growth momentum in the economy withcontrol on inflation.However, the budget has dampened market sentiments dueto increase in the short-term capital gain tax from 10% to15% and modifying the security transaction tax (STT) thatcould be unfavourable for traders and arbitragers.
Budget at a glance(Rs '00 crore)FY05AFY06AFY07AFY28REFY09BE
Gross tax revenues3,049.63,661.54,735.15,854.16,877.2
% y-o-y change19.920.129.323.617.5
Net tax revenues2,248.02,689.43,511.84,317.75,071.5
% y-o-y change20.219.630.622.917.5
Non tax revenues811.9768.1832.1933.3957.9Total expenditure4,982.55,061.25,833.97,093.77,508.8
% y-o-y change5.71.615.321.65.9
Plan expenditure1,322.91,406.41,698.62,075.22,433.9
% y-o-y change8.26.320.822.217.3
Non plan expenditure3,659.63,654.94,135.35,018.55,075.0
% y-o-y change4.9-0.113.121.41.1
Fiscal deficit1,257.91,481.41,425.71,436.51,332.9
As % of GDP4.04.23.53.12.5
Revenue deficit783.4940.1802.2634.9551.8
As % of GDP2.52.62.01.41.0
Primary deficit-11.4155.1-77.0-283.2-575.2
As % of GDP0.00.4-0.2-0.6-1.1
Key proposals in the budget 2008-09Custom duty
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Considering the appreciation of the rupee, the peak rateof custom duty has been retained at 10%
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Duty on project imports has been reduced from 7.5% to5% along with a 4% additional countervailing duty (CVD)on specified power projects
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Duty on steel making scrap and aluminium scrap hasbeen reduced from 5% to nil
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In case of certain life saving drugs and on the bulk drugsused for the manufacture of such drugs, the customduty has been reduced from 10% to 5% without any CVD
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No duty on specified parts of set top boxes and specifiedraw materials for use in IT/electronic hardware industry
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Investors EyeFebruary 29, 2008
investors eyesharekhan budget special
Excise duty
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As a stimulus to the manufacturing sector, the generalexcise duty rate has been reduced from 16% to 14%.The FM has also reduced the excise duties on specificsectors where growth is slowing
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Excise duty on pharmaceutical products has beenreduced from 16% to 8%
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Excise duty on buses and their chassis has been reducedfrom 16% to 12%
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Excise duties on small cars have been lowered from 16%to 12% and for hybrid cars from 24% to 14%
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Excise duty on two- and three-wheelers has been reducedfrom 16% to 12%
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No change in service tax rate but four new services arebrought under the tax net
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Reduction in central sales tax from 3% to 2%
Direct taxes
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Rationalisation of personal income tax by increasing theannual income bracket for each tax slab
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No change in the corporate tax rates or surcharges
Capital market
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The rate of tax on short-term capital gain has beenraised from 10% to 15%
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Transactions on commodity futures will have to bear acommodity transaction tax on the same line as STT
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STT paid to be treated like any other deductableexpenditure against business income
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STT in the case of the options will be on the optionpremium where the option is not exercised and theliability will be on the seller. If the option is exercisedthe levy will be on the settlement price and the liabilitywill be on the buyer
Corporate sector
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Exemption of tax deduction at source for corporatebonds has been listed in recognised exchanges
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Extension of amortisation benefits of certain preliminaryexpenses has been made to the service sector
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Companies engaged in production of seeds andmanufacture of agricultural implements has beenallowed to claim 150% deduction on any expenditure onin-house scientific research
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To promote outsourcing of research, it is proposed toallow a weighted deduction of 125% on any paymentmade to companies engaged in research anddevelopment
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Five-year tax holiday has been proposed for hospitalsset up between April 1, 2008 to March 31, 2013 andsatisfying specified conditions
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Five-year tax holiday has been proposed for hotels setup between April 1, 2008 to March 31, 2013 andsatisfying specified conditions
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Parent company have been allowed to set off dividendreceived from its subsidiary company against dividenddistributed by the parent company, provided the dividendreceived has suffered DDT (dividend distribution tax)and the parent company is not a subsidiary of anothercompany
Fiscal performanceFiscal consolidation:
The buoyancy in the tax collectionhas enabled the government to comfortably meet the deficittargets in 2007-08. The revenue deficit and fiscal deficitstood at 3.1% and 1.4% respectively. The tax to GDP ratioimproved to 12.5%, up from 9.2% in 2003-04.In 2008-09, the government expects the direct and indirecttax revenues to increase by 19.8% and 15% respectively.Consequently, the net tax revenues are expected to growby 17.5% in 2008-09. The tight control on expenditure to agrowth of 5.9% is expected to contain the revenue deficitto 1% and fiscal deficit at 2.5% in 2008-09 despite theenhanced allocation for rural and social sectors. However,it should be noted that there is no provision for additionalexpenditure related to debt waivers to farmers or additionalexpenditure on account of implementation of sixth paycommission.Given the revenue deficit target in 2008-09, the FM aimsto extend the FRBM target to eliminate the revenue deficitby one year. Moreover, the FM has requested the financecommission to revise the fiscal adjustment roadmap.
Improving fiscal performance
02004006008001,0001,2001,4001,600FY04A FY05A FY06A FY07A FY08RE FY09BE0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%Fiscal deficit As % of GDP
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Investor's Eye Feb29
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