You are on page 1of 24

Visit us at www.sharekhan.

com

March 16, 2012

Union Budget 2012-13: Right on intent, low on action


The Union Budget 2013 reflects another instance of the governments indecisiveness on critical policy issues. In his speech, the finance minister acknowledged that there is a need to achieve fiscal consolidation, curtail subsidy burden and revive private investments but he did little in terms of policy action to address the same. The budget proposes steps to boost revenues by rolling back fiscal stimulus (a 2% hike in both the excise duty and the service tax rate) and expresses intent to limit the subsidy bill to 2% of the gross domestic product (GDP; against 2.5% in FY2012). But there is no clear roadmap of the action needed to achieve the same. One senses that the governments focus has been on the safe passage of the finance bill and that the measures to cut down subsidy burden and to achieve the targeted fiscal consolidation will follow suit post budget. On the whole, the finance minister in this budget has set more realistic targets than he had in the previous year but he has missed out perhaps
Trends in tax revenues (Rs '00 crore) Gross tax revenues Gross tax revenue % YoY Direct tax % change YoY Corporation tax % change YoY Income tax % change YoY Indirect tax Indirect tax revenue YoY Indirect tax as of total Excise % change YoY Import duty % change YoY Service tax % change YoY Other tax revenues % change YoY FY2006A 3,661.5 20.1 1,572.6 19.2 1,012.8 22.5 559.9 13.6 2,088.9 20.7 57.1 1,112.3 12.2 650.7 12.9 230.6 62.4 95.4 360.1 FY2007A 4,735.1 29.3 2,194.1 39.5 1,443.2 42.5 750.9 34.1 2,541.0 21.6 53.7 1,176.1 5.7 863.3 32.7 376.0 63.1 125.6 31.6 FY2008A 5,931.5 25.3 2,955.6 34.7 1,929.1 33.7 1,026.4 36.7 2,975.9 17.1 50.2 1,236.1 5.1 1,041.2 20.6 513.0 36.4 185.6 47.8 FY2009A 6,053.0 2.0 3,194.4 8.1 2,134.0 10.6 1,060.5 3.3 2,858.6 -3.9 47.2 1,086.1 -12.1 998.8 -4.1 609.4 18.8 164.2 -11.5 FY2010A 6,245.3 3.2 3,770.4 18.0 2,447.3 14.7 1,323.2 24.8 2,474.9 -13.4 39.6 1,036.2 -4.6 833.2 -16.6 584.2 -4.1 21.2 -87.1 FY2011A 7,930.7 27.0 4,452.7 18.1 2,986.9 22.1 1,465.9 10.8 3,478.0 40.5 43.9 1,383.0 33.5 1,358.1 63.0 710.2 21.6 26.7 25.9 FY2012RE 9,016.6 13.7 4,995.6 12.2 3,276.8 9.7 1,718.8 17.3 4,021.1 15.6 44.6 1,507.0 9.0 1,530.0 12.7 950.0 33.8 34.1 27.7 FY2013BE 10,776.1 19.5 5,690.1 13.9 3,732.3 13.9 1,957.9 13.9 5,086.0 26.5 47.2 1,943.5 29.0 1,866.9 22.0 1,240.0 30.5 35.5 4.3

the last opportunity before the general election to take bold policy decisions. Key positives The budget sets a fiscal deficit target of 5.1% (against 5.9% in FY2012) and a total subsidy target of 2% of the GDP; but the roadmap to achieve the same is not clear, given the absence of any proposal to pass on the higher cost to consumers. It provides incentives for the infrastructure sector in terms of easing norms/limits for external commercial borrowings (ECBs) and of channelising higher retail savings into infrastructure bonds. It lowers the personal tax burden by 12-15% for the middle income group which will have a positive impact on consumption/discretionary spending. The budgeted tax revenue receipts appear to be more realistic this year. The gross tax revenue growth of

For Private Circulation only


Sharekhan Ltd, Regd Add: 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai 400 042, Maharashtra. Tel: 022 - 61150000. BSE Cash-INB011073351; F&OINF011073351; NSE INB/INF231073330; CD - INE231073330; MCX Stock Exchange: CD - INE261073330 DP: NSDL-IN-DP-NSDL233-2003; CDSL-IN-DP-CDSL-271-2004; PMS INP000000662; Mutual Fund: ARN 20669. Sharekhan Commodities Pvt. Ltd.: MCX10080; (MCX/TCM/CORP/0425); NCDEX -00132; (NCDEX/TCM/CORP/0142)

sharekhan budget special

right on intent, low on action

19.5% would be supported by a robust growth in the indirect taxes resulting out of an increase in the excise duty and service tax rates. It reduces the securities transaction tax (STT) by 20% on cash delivery transactions and proposes to introduce equity saving schemes with tax deduction of 50% on direct equity investments up to Rs50,000 by retail investors having annual income below Rs10 lakh. The equity savings scheme would have a lock-in period of three years. It proposes steps to attract foreign inflows by allowing qualified financial institutions (QFIs) to access the Indian bond market and by introducing two-way fungibility for Indian depository receipt issues. Key negatives The governments borrowing figure (net) of Rs479,000 crore (as against Rs437,000 crorethe revised estimate Gainers of budget 2012-13
Sector Infrastructure Logistics Comments

of FY2012) exceeds the consensus estimate, and would adversely affect the liquidity conditions and increase the risk of crowding out of the private sector. No material reforms have been announced in the budget; there has been no hike in the foreign direct investment (FDI) limit in aviation, insurance and retail sectors either. The budget has not announced any timeline for the implementation of tax reforms, the Goods and Services Tax (GST) and the Direct Tax Code (DTC). It has abolished the import duty on coal but not mentioned anything about restructuring the state electricity boards (SEBs) required to boost the power generation sector. It has increased the cess on oil upstream companies which is ill-timed, given the recent auction of ONGC offer for sale.

Investment in infrastructure doubled in 12th Five-Year Plan, tax-free bonds doubled, withholding tax on interest payment on ECBs reduced from 20% to 5%. 100% deduction allowed on capital expenditure (capex) on container freight stations (CFS)/inland container depot (ICD), increased deduction from 100% to 150% on capex on cold chain warehouses. Positive for Gateway Distriparks, Arshiya International and other logistic companies. Reduction in incidence of the excise duty on branded apparels from 4.5% to 3.6% is likely to boost the demand for branded apparels, and benefit companies like Provogue and Raymonds. Clear attention on fuel security front; customs duty cut for coal, natural gas, liquefied natural gas (LNG) and coal mining equipment; allocation of tax-free bonds of Rs10,000 crore; ECB fund raising promoted with easier norms. However, no mention of restructuring of SEBs is a negative. Exemption of film content from service tax ambit, faster GST roll-out and higher capital availability through venture capital funding. Positive for companies like Eros International, PVR Cinemas, Cinemax and Reliance MediaWorks. Increase in allocation for education projects/skill development/unique identification (UID; Aadhaar) positive for NIIT, Everonn Education, Educomp Solutions, Tera Software, CMC etc.

Retail Power

Media

Education/UID

Losers of budget 2012-13


Sector Oil & Gas Auto Comments Lower provisioning of subsidy, no hike in prices of petroleum products and increase in cess negative for Oil India, ONGC and the oil marketing companies (OMCs). Excise duty hike of over 2% and higher excise on truck chassis negative for Tata Motors and Ashok Leyland. Though no announcement of additional excise duty on diesel vehicles is a relief for Mahindra and Mahindra (M&M) and Maruti Suzuki. Increase in basic excise duty (from 10% to 12% on bulk drugs and from 5% to 6% on formulations), imposition of alternative minimum tax (AMT) on profits from partnerships affects Sun Pharmaceuticals, Strides Arcolab and Cadila Healthcare in terms of a higher tax incidence. Non-tax revenue break-up shows a budgeted estimate of Rs40,000 crore from the auction of spectrum which would be pressure on the cash flow situation on the telecom sector. Plus, increase in service tax would make telecom services more expensive. Increase in service tax from 10.3% to 12.36% and non-granting of infrastructure status are both negative.

Pharma

Telecommunications

Hotel

Sharekhan

March 16, 2012

sharekhan budget special

right on intent, low on action

Fiscal deficit pegged @5.1%...will RBI cut rates? Potential slippages in fiscal consolidation While the market was expecting a definite clarity on the fiscal consolidation front, the budget inadequately addresses the same. Though the 5.1% fiscal deficit target is lower than the FY2012 target of about 5.9%, the revenue target could be missed as the same is based on an assumption of a recovery in economic growth in
Trend in fiscal deficit
6,000 5,000 4,000 3,000 2,000 1,000 0 FY2012RE -1,000 FY2013BE FY1999A FY2000A FY2001A FY2002A FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A 7% 6% 5% 4% 3% 2% 1% 0% -1% -2%

FY2012-13. Second, there is no clarity on the roadmap to limit the subsidy bill within 2% of the GDP unless the government takes some out-of-the-budget steps to curtail fuel and fertiliser subsidy. For instance, on fertiliser side also the subsidy budgeted is Rs60,000 crore (compared with ~Rs67,200 crore in FY2012) which seems insufficient. Therefore, as the crude prices and fertiliser prices remain firm the slippage on subsidies is likely to be similar to that seen in FY2012. High target for market borrowings; could increase further on fiscal slippages The gross market borrowings for FY2013 are pegged at Rs479,000 crore compared with Rs436,000 crore in FY2012. During FY2012 the borrowings were revised upwards due to fiscal slippages, so higher borrowings on an expanded base will be perceived as a negative by the market. This is likely to keep the bond yields firm and may affect the private investments. However, if the fiscal deficit expands the borrowings could inch up as had happened in FY2012.

Fiscal Deficit FD as % of GDP

Revenue Deficit RD as % of GDP

Primary Deficit PD as % of GDP

Fiscal consolidation targets


6,000 5,000 4,000 3,000 2,000 1,000 FY2012RE 0 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2011A FY10A FY2013BE 7% 6% 5% 4% 3% 2% 1% 0%

Government borrowings (Rs 00 crore)


6,000 5,000 4,000 3,000 2,000 1,000 FY2012RE 0 FY2002A FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2013BE Gross Debt Market Borrow ings Net Debt Market Borrow ings net as % of gross borr 95% 90% 85% 80% 75% 70% 65% 60% 55% 50%

Fiscal Deficit

FD as % of GDP

Major outlays by centre Particulars Agriculure and allied activities Rural development Irrigation and food control Energy Industry and minerals Transport Communication Science technology and environment General economic surveys Social services General services Grand total FY2012BE 14,744 46,292 565 155,495 45,214 116,861 20,256 16,186 15,802 153,812 7,230 592,457 FY2012RE 14,855 39,132 489 147,190 40,581 109,205 11,994 12,713 19,420 157,056 5,536 558,172 Change YoY % 0.8 (15.5) (13.4) (5.3) (10.2) (6.6) (40.8) (21.5) 22.9 2.1 (23.4) (5.8) FY2013BE 17,692 40,763 1,275 154,842 57,227 125,357 15,411 16,592 24,777 188,872 8,701 651,509 Change YoY % 19.1 4.2 160.6 5.2 41.0 14.8 28.5 30.5 27.6 20.3 57.2 16.7

Rs (cr)

Sharekhan

March 16, 2012

sharekhan budget special

right on intent, low on action

Focus on social schemes continues Focus on its pet schemes like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), right to education (RTE) etc would continue. The expenses on administering the implementation of food security will be fully provided in the FY2013 budget. Further, the government has raised allocation to RTE by 22%, to National Rural Health Mission (NRHM) by 15% and to National Family Benefit Scheme (NFBS) by 100%, showing its inclination for social schemes.
Trend and composition of subsidies
2500 2000 1500 1000 500 FY12RE FY13BE 0 FY02A FY03A FY04A FY05A FY06A FY07A FY08A FY09A FY10A FY11A

Conclusion: increased uncertainty on policy rate cuts in April 2012 Thus, the government has done little to inspire enough confidence in the Reserve Bank of India (RBI) to begin its policy rate reversal cycle in April this year. We believe that the RBI would prefer the crude oil prices to cool down and the government to take some out-of-the-budget steps to rein in the subsidy bill. The hardening of the bond yields by 10-12 basis points also reflects the nervousness in the debt market and indicates the growing uncertainty over the possibility of policy rate cuts in April this year.
Proceeds from disinvestments
450 400 350 300 250 200 150 100 50 0 FY1999A FY2000A FY2001A FY2002A FY2003A FY2004A FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A

FY2012RE

Food

Fertilisers

Petroleum Subsidy

Privatisation / Divestments

Personal income tax In the Union Budget 2012-13, the finance minister has increased the basic exemption limit for individual tax payers to Rs200,000 from the earlier Rs180,000 which would lead to a saving of Rs2,060 per tax payer (for female tax payers Rs1,030). The budget has also raised the upper limit of 20% tax slab to Rs1,000,000 from the earlier Rs800,000 which would lead to an additional benefit of Rs20,600 per tax payer. Further, the budget has introduced a new section, 80TTA, wherein deduction would be allowed to the tax payer (individual and Hindu Undivided Family) up to Rs10,000 in respect of any income by way of interest on deposits in savings account with banks, co-operative banks and post office. Section 80D (relating to medical insurance) would be

amended to include the payment made on account of preventive health check-up for an amount of up to Rs5,000 (effective from April 1, 2013). Finally, the effective age of a senior citizen being an Indian resident has been reduced from sixty-five years to sixty years for all purposes.
Individual tax payers FY2011-12 Tax slabs (Rs) Up to 180,000 180,001 500,000 500,001- 800,000 Above 800,001 Tax rate (%) Nil 10.3 20.6 30.9 Tax slabs (Rs) Up to 200,000 200,001 500,000 above 1,000,001 FY2012-13 Tax rate (%) Nil 10.3 30.9

500,001 - 1,000,000 20.6

Sharekhan

March 16, 2012

FY2013BE

sharekhan budget special


Government finances (Rs '00 crore) Gross tax revenue Corporate tax Income tax Customs Union excise duties Service tax Other taxes Less: Devolvement to states & UTs Less: NCCF expenditure Net tax revenues Non-tax revenues Net revenue receipts Non-debt capital receipts Recovery of loans Privatisation / Divestments Total revenues Revenue expenditure Interest Defence Defence reported Less: capital exp. portion Subsidies Pensions Grants to states and UTs Admin and social services Plan expenditure Capital expenditure Defence Loans Plan expenditure Total Plan expenditure Total Non-Plan exp. Total expenditure Fiscal deficit FD as of GDP Revenue deficit RD as of GDP Primary Deficit PD as of GDP FY2007A 4,735.1 1,443.2 750.9 863.3 1,176.1 376.0 125.6 1,203.3 20.0 3,511.8 832.1 4,343.9 64.3 58.9 5.3 4,408.1 5,146.1 1,502.7 516.8 855.1 338.3 571.3 221.0 357.3 552.7 1,424.2 687.8 338.3 75.1 274.4 1,698.6 4,135.3 5,833.9 1,425.7 3.4 802.2 1.9 -77.0 -0.2 FY2008A 5,931.5 1,929.1 1,026.4 1,041.2 1,236.1 513.0 185.6 1,518.0 18.0 4,395.5 1,023.2 5,418.6 439.0 51.0 388.0 5,857.6 5,944.3 1,710.3 542.2 916.8 374.6 709.3 242.6 357.7 646.6 1,735.7 1,182.4 374.6 492.7 315.1 2,050.8 5,075.9 7,126.7 1,269.1 2.7 525.7 1.1 -441.2 -0.9 FY2009A 6,053.0 2,134.0 1,060.5 998.8 1,086.1 609.4 164.2 1,601.8 18.0 4,433.2 969.4 5,402.6 67.1 61.4 5.7 5,469.6 7,938.0 1,922.0 732.2 1,142.2 410.0 1,297.1 329.4 381.6 927.9 2,347.7 901.6 410.0 87.0 404.6 2,752.4 6,087.2 8,839.6 3,369.9 6.0 2,535.4 4.5 1,447.9 2.6 FY2010A 6,245.3 2,447.3 1,323.2 833.2 1,036.2 584.2 21.2 1,648.3 31.6 4,565.4 1,162.8 5,728.1 331.9 86.1 245.8 6,060.1 9,118.1 2,130.9 906.7 1,417.8 511.1 1,413.5 561.5 459.5 1,107.2 2,538.8 1,126.8 511.1 120.6 495.1 3,033.9 7,211.0 10,244.9 4,184.8 6.2 3,390.0 5.0 2,053.9 3.0 FY2011A 7,930.7 2,986.9 1,465.9 1,358.1 1,383.0 710.2 26.7 2,193.0 39.0 5,698.7 2,186.0 7,884.7 352.7 124.2 228.5 8,237.4 9,589.5 2,340.2 920.6 1,541.2 620.6 1,734.2 574.1 497.9 380.2 3,142.3 1,566.1 620.6 297.5 648.0 3,790.3 7,365.2 11,155.5 3,735.9 4.7 1,704.7 2.2 1,395.7 1.8

right on intent, low on action

FY2012RE 9,016.6 3,276.8 1,718.8 1,530.0 1,507.0 950.0 34.1 2,554.1 40.0 6,422.5 1,247.4 7,669.9 297.5 142.6 154.9 7,967.4 11,619.4 2,756.2 1,047.9 1,709.4 661.4 2,163.0 561.9 553.2 1,075.2 3,462.0 1,567.8 661.4 102.3 804.0 4,266.1 8,921.2 13,187.2 5,219.8 5.9 3,949.5 4.4 2,463.6 2.8

FY2013BE 10,776.1 3,732.3 1,957.9 1,866.9 1,943.5 1,240.0 35.5 3,019.2 46.2 7,710.7 1,646.1 9,356.8 416.5 116.5 300.0 9,773.3 12,861.1 3,197.6 1,138.3 1,934.1 795.8 1,900.2 631.8 642.1 1,146.0 4,205.1 2,048.2 795.8 247.3 1,005.1 5,210.3 9,699.0 14,909.3 5,135.9 5.1 3,504.3 3.4 1,938.3 1.9

Sharekhan

March 16, 2012

sharekhan budget special

right on intent, low on action

Sectoral analysis Automobiles


Issue Roll-back of excise duty on small cars (<4m), twowheelers Roll-back of excise duty on petrol cars (>4m, engine capacity below 1200cc) Roll-back of excise duty on diesel cars (>4m, engine capacity below 1500cc) 10% Current Status 12% Expectation Announcement Hiked to 12% Impact Negative but no surprises as such an increase was expected. Higher excise will be passed on to customers.

22%

24%

Hiked to 24%

Sentimentally negative.

22%

24%

Hiked to 24%

Sentimentally negative.

22% + Rs15,000 Roll-back of excise duty on large cars (>4m, engine capacity above 1500cc) Additional duty 0% on diesel passenger vehicles

24% + Rs15,000

Hiked to 27%

Negative as increase is higher than expected.

Rs25,000 for small cars and over Rs60,000 for large cars

No additional tax

Contrary to the Streets expectations, no additional tax on diesel vehicles would support the growth. Positive for M&M, Tata Motors and Maruti Suzuki. Negative for all commercial vehicle players like Tata Motors, Ashok Leyland and Eicher Motors as 85% of trucks sold are without body. Negative for MNC car players as well as domestic players like M&M (which plans to introduce Ssyangong products) and Tata Motors (for JLR imports). Positive for M&M, Tata Motors.

Excise duty on truck chassis (without body)

10% + Rs10,000

10% + Rs10,000

15%

60% Customs duty on automobiles imported in CBU form, priced above $40,000

60%

Hiked to 75%

Excise and customs duties on specified parts of hybrid vehicles Excise and customs duties on lithium ion batteries for electric/hybrid vehicles Increase in income tax slabs

Excise = 10%, Customs = 10%

Unchanged

Excise reduced to 6% and customs duty to nil

Excise = 10%, Customs = 10%

Unchanged

Excise reduced to 6% and customs duty to nil

Positive for M&M, Tata Motors, Exide Ind.

No tax till Rs180,000

No tax till Rs250,000

No tax till Rs200,000

Overall positive as it supports discretionary spending. Contd...

Sharekhan

March 16, 2012

sharekhan budget special

right on intent, low on action

Automobiles (contd...)
Issue Minimum Alternate Tax (MAT) rate 18.5% Current Status 20% Expectation Announcement Unchanged Impact Neutral for MAT paying companies like Ashok Leyland Ltd (ALL), HeroMotoCorp, Eicher Motors.

Fuel price hike

Under-recoveries for diesel Rs11/l

Unchanged

Limited subsidy on petrol/ Likely increase in petrol and diesel diesel prices in short term. Sentimentally negative for automobiles. Double NHAI allocation to Positive for MHCV players Rs10,000 crore like Tata Motors, ALL, Eicher Motors. Target 8,800km worth of projects Positive for MHCV players like Tata Motors, ALL, Eicher Motors

Tax-free bonds of Rs10,000 crore for NHAI

Rs5,000 crore

Unchanged

Rs25,360 crore Rs22,000 crore allocated to Ministry of Road Transport and Highways Agri-credit increased by Rs1 lakh crore to Rs5.75 lakh crore Rs4.75 lakh crore

Unchanged

Unchanged

Rs5.75 lakh crore

Positive for M&M, Hero MotoCorp as it would boost agri demand.

200% weighted R&D benefits to end in reduction in in- 2012 house R&D Auto ancillaries: 10% excise roll-back

Extension

R&D benefits extended for Positive for all auto five years companies.

12%

Hiked to 12%

Negative but no surprises as such an increase was expected. Higher excise will be passed on to customers. Positive for Apollo Tyres, Tata Motors, Mothersun Sumi

Tax on dividend 16.2% (15% + surcharge) Extension from specified foreign companies with stake of 26% and above

Extended to assessment year FY2013

Sharekhan

March 16, 2012

sharekhan budget special

right on intent, low on action

Banking
Issue Current Status Expectation Capital infusion of tier-I capital of the PSBs, in line with the stricter Basel III norms. Announcement The government will infuse capital to the tune of Rs15,888 crore in PSU banks. Also the financial holding company is planned for raising capital for PSU banks. Tax limit reduced to 5% from 20%. Impact The additional capital will help banks in regulatory compliance and fund business growth, and is positive for PSU banks. The clarity on financial holding company is awaited. This is positive for the infrastructure finance companies like IDFC, REC and PFC. Recapitalisation Capital is likely to be of the PSBs infused in banks by preferential allotment to government and Life Insurance Corporation.

20% withholding tax on Decline in withholdong tax interest payments on ECBs. on interest payment on ECBs Interest subvention on agriculture loans

No expectation.

Expected to extend in Interest subvention FY2013. scheme for providing short-term crop loans to farmers at 7% was to expire in 2011-12.

Interest subvention scheme continued in 201213. Additional subvention of 3% available for prompt paying farmers.

This is likely improve the payment discipline in the agri segment, which has seen a sharp rise in the NPAs and is positive for PSU banks. This is likely to improve the savings bank deposits for the banks. Since market borrowings will be higher than the FY2012 borrowings it will add pressure to bond yields and is negative for banks.

Savings bank interest

No exemption

No expectation.

Bank interest deductible up to Rs10,000.

Government borrowings

The government has borrowed (net) Rs4.36 trillion in FY2012.

Expected to stay at similar Government borrowings levels. marked at Rs4.79 lakh crore (net).

Sharekhan

March 16, 2012

sharekhan budget special

right on intent, low on action

Capital Goods and Engineering


Issue Increase in excise duties Imposition of import duty on equipment for power projects greater than 1000MW Budget allocation Defence Defence expenditure pegged at Rs193,007 crore, an increase of 17.4% YoY. Capital outlay raised to Rs79,579 crore (up 15% YoY). Allocation increased to Rs3,355 crore (up 56% YoY on budget estimates) and a couple of duty incentives announced for the solar and wind power projects. 1)Rs10,000 crore of taxfree bonds for power sector and Rs60,000 crore worth bonds for infrastructure sector. 2)Thermal power companies exempted from customs duty for two years. 3)To allow ECBs to part finance rupee debt in power projects. Excise duty on LED lamps 10.0% Excise duty is being reduced to 6% on LED lamps and LEDs required for manufacture of such lamps. Special Additional Duty (SAD) is being fully exempted on LEDs used for manufacture of LED lamps. Basic customs duty on train protection and warning system reduced to 7.5%. Positive for companies providing defence equipment, eg BEL, BEML, L&T etc. 10% Current Status Expectation A 2% hike Announcement Hiked to 12% Impact Impact would depend on the companies ability to pass on the price hike to clients. Negative for the domestic manufacturers like BHEL, L&T, BGR and Thermax, which have been reeling under aggressive competition from China.

Import duty for projects> Import duty of 14-19% 1,000MW exempted imposed

No action taken

Renewable energy

Positive for renewable energy players like Suzlon, Shriram EPC, Moser Bear etc.

Incentives to power and infrastructure sectors

These reforms will boost investment in the power and infrastructure sectors, resulting in a surge in orders for the capital goods segment.

Positive for Havells and Bajaj Electricals.

Railways: 10.0% customs duty on train safety systems

Positive for Siemens and Kernex

Sharekhan

March 16, 2012

sharekhan budget special

right on intent, low on action

Cement
Issue Excise duty on cement Current Status Expectation Announcement Impact Largely neutralas the 2% increase in the duty will get offset by the reduction in the additional duty from Rs160 per tonne to Rs120 per tonne. Further, a benefit in terms of abatement of 30% on retail price has been announced. Excise duty is expected 12% ad valorem tax + Ad valorem tax on packaged cement is 10% to increase by around 2%. Rs120 per tonne + Rs80 per tonne, where MRP is less than Rs190 per bag. On the other hand, where the MRP for cement is greater than Rs190, the ad valorem tax is 10% on ex factory + Rs160 per tonne. 10% ad valorem + Rs200 per tonne 12% ad valorem tax

Excise duty on clinker

Marginally positive as additional duty of Rs200 per tonne is exempted. Neutral for all cement companies.

VAT

VAT on cement and clinker is charged at 12.5%.

Reduction in VAT to 4% to No change bring the same in line with the VAT on the other construction materials like steel. Reduction in import duty on coal to 0%. Import duty on coal is reduced to nil till March 2014.

Import duty on coal

Import duty on coal is 5%.

Marginally positive as it will lead to a decrease in the overall cost of coal. Major beneficiaries are India Cements, Madras Cement and UltraTech Positive for the industry as a whole as it will lead to volume growth for cement companies. Positive for the industry as a whole as it will lead to volume growth for cement companies.

Allocation to road transport and highways

Enhanced by 14% to Rs25,360 crore

Allocation to infrastructure and development plans

Investment in infrastructure to go up to Rs50 lakh crore during the 12th Five-Year Plan.

Education
Issue Allocation for education Current Status Allocation of Rs52,060 crore in Union Budget 2011-12. Expectation Increase in allocation Announcement Impact 17% increase in allocation Positive for all education to Rs61,427 crore. institutes and companies like NIIT, Educomp, Everonn and Navneet Publications among others. 21% increase in allocation Positive for all education to Rs25,555 crore. institutes and companies like NIIT, Educomp and Everonn among others. 26 additional projects sanctioned with total funding of Rs547 crore and target of 6.2 crore skilled workforce in 10 years. National Skill Development Fund provided Rs1,000 crore.
March 16, 2012

Allocation towards Sarva Shiksha Abhiyaan Skill development

Allocation of Rs21,000 crore in Union Budget 2011-12. 26 projects sanctioned with total funding of Rs658 crore and target of 15 crore skilled workforce by 2022; National Skill Development Fund provided Rs500 crore.

Increase in allocation

Increase in allocation

Positive for companies like NIIT and Everonn who have tied up with National Skill Development Corporation (NSDC).

Sharekhan

10

sharekhan budget special

right on intent, low on action

Fertiliser
Issue Planned expenditure of fertiliser subsidy Reduction in per kg subsidy on NPK fertilisers Government may bring partial decontrol in urea Current Status Total fertiliser subsidy outgo for FY2012 is Rs67,199 crore Higher subsidy to complex fertilisers due to higher international prices New pricing scheme stage III Expectation Reduction in subsidy payout to fertilisers. Announcement Planned subsidy pay-out for fertiliser in FY2013 is Rs60,974 crore. The government has reduced the subsidy on complex fertilisers. Impact Negative if the prices of raw materials do not fall in the international markets. Negative for Coromandel, GSFC and Deepak Fertilizers.

5 to 30% decrease in per kg subsidy on NPK for complex fertilisers.

Partial decontrol of urea and 10% increase in the price of urea.

The government has taken steps to finalise the pricing and investment policies for urea to reduce India's dependence on urea imports. A mobile-based fertiliser management system has been designed to provide end-to-end information on the movement of fertilisers and subsidies. The first phase of the nation-wide roll-out will be done during 2012. Basic customs duty on specified water soluble and liquid fertilizers is being reduced from 7.5% to 5% and from 5% to 2.5% respectively.

Positive for Chambal Fertilizer, RCF, Tata Chemicals and Zuari Industries.

First phase of direct transfer of fertiliser subsidy

Currently subsidy provided to companies

Proposal to transfer subsidy to retailers directly in first phase. Second phase will be direct transfer of subsidy to farmers.

This can reduce the working capital requirement of fertiliser companies. Positive for all fertiliser manufacturers.

Customs duty on fertilisers

Customs duty on water No expectation soluble fertilisers at 7.5% and that on liquid fertiliser at 5%

A small quantity of liquid and water soluble fertilisers are manufactured in India, but reduction in customs duty will increase the import of such fertilisers.

Customs duty on equipment

5% customs duty on fertiliser equipment

No expectation

Full exemption from basic Positive for companies like customs duty for import of Chambal Fertilizer, Zuari, equipment for expansion RCF and Tata Chemicals. or setting up of fertiliser projects upto March 31, 2015. Investment linked deduction of capital expenditure incurred in fertiliser is proposed to be provided at 150%. Positive for new investments proposed by Chambal Fertilizer, RCF, Zuari and Tata Chemcials.

Infrastructure spending

Investment-linked deduction of capital expenditure incurred in fertiliser is provided at 100%

No expectation

Subsidy pay out Particulars Indigenous urea Imported urea Non urea fertiliser Total Actual FY11 15081 6454 40767 62302 Budget FY12 13308 6983 29707 49998 Revised FY12 19108 13883 34208 67199

(Rs cr) Budget FY13 19000 13398 28576 60974

Sharekhan

11

March 16, 2012

sharekhan budget special

right on intent, low on action

FMCG
Issue In general Increase in excise duty 10% currently Increase by 2% Increased by 2% to 12% Most FMCG companies have low single-digit excise payouts as their facilities are located in excise-free zones. However, HUL and Asian Paints will be the most affected, as a higher proportion of their sales come from excisable facilities. Positive for FMCG companies whose 30-50% of total revenues comes from rural India. Current Status Expectation Announcement Impact

Focus on rural development

Allocation under various schemes to develop rural India

Allocation to National Rural Livelihood Mission increased by 34% to Rs2,914 crore and that to Prime Minister Employment Generation Programme increased by 23% to Rs1,276 crore. Extended to assessment year 2013-14.

Tax on dividend Tax rate 15% plus surcharge and cess, ie received from 16.22% specified foreign companies (shareholding 26% or more) Category-wise Excise duty on cigarettes Specific excise duty (varying with the type and the length of a cigarette)

Positive for FMCG companies, which receive dividend from their foreign subsidiaries.

Ad-valorem tax of 10% Increase by 8-12% (Streets expectation was (with abatement of 50%) on specified excise duty 12-15%). on all slabs of cigarettes (exceeding the length of 65mm).

This would result in ~15% increase in the excise duty on cigarettes for ITC. With strong pricing power ITC can pass on the excise duty hike through further price hikes in its cigarette portfolio. There is a likelihood of ITC launching cigarettes below the 65mm filter cigarette category or reducing the length of cigarettes for some brands below 65mm. Overall excise hike is earnings neutral for ITC. Positive for paint companies like Asian Paints, Berger Paints, Kansai Paint and Nerolac. Partially positive for companies like Britannia Industries, ITC, GlaxoSmithKline Consumer Healthcare, Parle Agro and other biscuit manufacturers.

Customs duty on titanium dioxide

10% currently

Reduced to 7.5%.

Excise duty on biscuits

8% currently

Full exemption was expected

Excise duty on biscuits priced at Rs100 per kg or less than Rs100 per kg has been reduced to nil.

Contd...
Sharekhan

12

March 16, 2012

sharekhan budget special

right on intent, low on action

FMCG (contd...)
Issue Category-wise Excise duty on tea including tea waste Re1 per kg Full exemption. Positive for domestic tea processing and branding companies such as Tata Global Beverages, HUL, McLeod Russel and Jayshree Tea. Marginally positive for Nestle India. Positive for companies like Nestle India, ITC, Cadburys India and companies using cocoa in their food preparations. Marginally positive for ITC, positive for companies like Perfetti and other confectionary companies. Current Status Expectation Announcement Impact

Excise duty on 16% currently condensed milk Excise duty on cocoa and cocoa preparations 16% currently

Proposal was of full exemption -

Full exemption.

Full exemption.

Excise duty on 16% currently sugar confectionery (excluding white chocolate and bubble gum)

Proposal was of full exemption

Excise rate reduced to 6%.

Hotel
Issue Service tax Current Status 10.3% currently Expectation Announcement Impact Increased to 12.36% Negative for hotel industry. (including education cess)

Excise duty on 16% currently food preparations in hotels and restaurants

Nil

Positive for food and beverages segment of the hotel industry. Also positive for restaurant brands such as Urban Tadka, Masala Zone, Barbeque Nations etc. Negative for the hotel industry.

Infrastructure status to hotel industry

Extend benefits under section 10 (23G) of the Income Tax Act to hotel industry

Sharekhan

13

March 16, 2012

sharekhan budget special

right on intent, low on action

Infrastructure
Issue Current Status Expectation Announcement Infrastructure investment will go up to Rs50 lakh crore in the 12th Five-Year Plan. About half of this is expected to come from the private sector. Impact Positive: Will result in larger number of new orders getting announced. Order book of the construction companies will continue to be robust Higher allocation Rs2.14 lakh crore Infrastructure spending by the provided for infrastructure government development in FY2012 which accounted for over 48.5% of the total plan outlay. Rs20 lakh crore was provided for the 11th Five-Year Plan. Roads and highways 7300 lane km to be awarded in FY2012. Allocation of Rs21,800 crore. Higher allocation

8,800 lane km to be awarded in FY2013. Allocation of Rs25,360 crore up 14%.

Allow ECB for capital expenditure on the operation Nod to raise money via ECB and maintenance (O&M) of toll route will help in reducing the cost of the projects. systems for roads and highways as long as they are a part of the original project. Full exemption from basic customs duty, countervailing duty (CVD) and SAD is being extended to equipment imported for road construction projects awarded by Metropolitan Development Authorities.

Positive for all asset developers, especially the large ones like ITNL, IRB, Reliance Infra etc.

Infrastructure tax-free bonds

Issue of tax-free bonds of Higher limit Rs30,000 crore has been allowed by various government undertakings in the year 2011-12. This includes Indian Railway Finance Corporation Rs10,000 crore, National Highway Authority of India (NHAI) - Rs10,000 crore, HUDCO - Rs5,000 crore and Ports Rs5,000 crore. Rs58,000 crore allocated Higher allocation in 2011-2012 under Bharat Nirman. Bharat Nirman includes Pradhan Mantri Gram Sadak Yojna (PMGSY), Accelerated Irrigation Benefit Programme (AIBP), Rajiv Gandhi Grameen Vidyutikaran Yojna, Indira Awas Yojna, National Rural Drinking Water Programme and Rural telephony

Double the limit of tax-free bonds to Rs60,000 crore. This includes Rs10,000 crore for NHAI, Rs10,000 crore for IRFC, Rs10,000 crore for IIFCL, Rs5,000 crore for HUDCO, Rs5,000 crore for National Housing Bank, Rs5,000 crore for SIDBI, Rs5,000 crore for ports and Rs10,000 crore for power sector.

Positive: Will boost infrastructure development in railways, ports, housing and highways development.

Rural infrastructure

Higher allocation to AIBP to Rs14,242 crore, up 13%. Further to mobilise funds, government owned Irrigation and Water Resource Finance Company is being operationalised in 2012-13 to focus on the sector. Allocation towards rural drinking water and sanitation has been pegged at Rs14,000 crore, up 27%.PMGSY has been allocated Rs24,000 crore, an increase of 20%.

Positive for Pratibha Industries, Unity Infra, Ramky, IVRCL, NCC, SPML Infra, etc.

Contd...

Sharekhan

14

March 16, 2012

sharekhan budget special

right on intent, low on action

Infrastructure (contd...)
Issue Current Status Expectation Announcement QFIs allowed to access the Indian corporate bond market Impact Positive: Will enhance the flow of funds to the overall infrastructure sector as well as long gestation projects, thereby easing the funding constraint and speeding up the execution. Infrastructure developers like IRB, ITNL, GMR Infra, IVRCL Infra, Gammon Infra, Ashoka Buildcon etc are set to benefit FII limit in The FII limit has been raised corporate bonds by an additional $20bn to $25bn. Since most of the infrastructure companies are organised in the form of special purpose vehicles (SPVs), FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. However, the FIIs will be allowed to trade amongst themselves during the lock-in period. Infrastructure debt fund Clarity on To create special vehicles in the form of infrastructure debt debt funds funds. Further interest payment on the borrowings of these funds will be subject to a reduced withholding tax rate of 5% instead of the current rate of 20%. Also the income of the fund will be exempt from tax. MAT rate increased to 18.5%, surcharge reduced to 5%, thus effective MAT rate is at 20.01%. NA -

The first infrastructure debt fund with an initial size ofRs8,000 crore has been launched.

Positive: Will attract foreign funds for infrastructure financing.

MAT and surcharge rate

Unchanged

Neutral for infrastructure developers like GMR, GVK, IRB, and all road BOT developers. Positive: This will push large projects under these sectors and further this is an important instrument in attracting private investment into the sector. Positive: Will lower the interest outgo on ECBs thus effectively reducing the cost of debts.

Sectors under viability gap funding (VGF) widened

Sectors like irrigation, common infrastructure in agriculture markets, oil and gas/LNG storage facilities and oil and gas pipelines, fixed network for telecom will be made "eligible sectors for VGF". The rate of withholding tax on interest payments on ECBs is reduced from 20% to 5% for three years in following sectors power; airlines; roads & bridges; ports and shipyards; affordable housing; fertilisers; and dams.

Withholding tax Currently 20% on interest payment on ECB

Customs duty

Exemption on customs duty, CVD, SAD etc on specific sectors.

Reduction in basic customs Positive: Will lower the cost duty on equipment required for of projects. Train Protection and Warning System and upgradation of track structure for high speed trains from 10% to 7.5%. Full exemption from basic customs duty and CVD at present available to tunnel boring machines for hydel and road projects is being extended to all infrastructure projects.

Sharekhan

15

March 16, 2012

sharekhan budget special

right on intent, low on action

Information Technology
Issue Minimum alternate tax (MAT) rate on special economic zone (SEZ) units and SEZ developers Refund of service tax Current Status Expectation Announcement Impact Neutral for all IT companies. MAT rate at 18.5%, Either abolish completely No change including surcharge and or reduce rate to 10%. education cess at 20.01%

Since 2008, IT companies Simplify and quicken the New scheme that will are paying service tax on service tax refund process. simplify refunds without resorting to voluminous input services. However documentation or as an EOU these services verification. are exempted from service tax. As per industry data, the government owes around Rs3,500 crore to IT/ITES companies. Tax rate of 15% plus surcharge and cess, ie 16.22%, applicable for assessment year 2012-13. Extended to assessment year 2013-14.

Positive for IT companies like Infosys, TCS and Wipro among others.

Tax on dividend from specified foreign company (shareholding of 26% or more) Clarity on tax on onshore services

Positive as IT companies have foreign subsidiaries who pay dividend to the domestic parent companies.

The income tax Clarity on the issue. department raised tax demand for earlier years on few IT companies.

No clarification made

Neutral for IT companies. However, clarity on this issue would have cleared doubts regarding the issue of similar demand notices going ahead. Positive for IT companies like CMC, Tera Software etc who are active in e-governance projects.

Implementation of Unique Identification (UID) and other mission mode projects

Clear government UID has enrolled 20 crore statement on UID project. people and adequate funds are to be allocated to enroll 40 crore more people. Also Aadhaar, platform is to be used for other e-governance projects.

Sharekhan

16

March 16, 2012

sharekhan budget special

right on intent, low on action

Logistics
Issue CFS /ICD NA Current Status Expectation Announcement 100% deduction on capex done on CFS and ICDs. Impact Positive for companies like Gateway Distriparks, Concor and Allcargo. Positive for Gateway Distriparks, Concor. Positive for Gateway Distriparks, Concor.

Cold chain

100% deduction on capex done. NA

Deduction enhanced to 150%.

Import duty

To extend concessional import duty available for installation of mechanised handling systems and pallet racking systems in mandis or warehouses for horticultural produce.

Media
Issue Current Status Expectation Announcement Impact Service tax on 10.3% cinematographic copyright Exemption of the film Exempt from service tax. Positive: With this move the industry from service exhibitors would be exempted tax on copyright on from the levy of service tax on cinematographic films. payments made by them to distributors for usage of cinematographic rights. Positive for entire film industry especially players like Eros International and PVR among others. Increased to 12.36% including education cess. Mildly negative for media and entertainment companies except the film industry, which is now being exempted from the service tax. Neutral for the media and entertainment companies. As and when GST is rolled-out it would help to reduce the multiple tax burden, especially the entertainment tax. Positive for media and entertainment companies as it will enhance the availability of funds for the sector. Negative for the media companies mainly DTH and cable operators.

Service tax

Current tax rate at 10.3%.

GST

Multiple taxation at the centre and state levels.

Clear timeline on rollout

GST network will be rolled out by August 2012. Implementation timeline yet to be decided. VCF open to invest in all sectors except agriculture and atomic energy, which are still restricted.

Investment by Restricted to nine venture capital sectors. funds (VCF)

Customs duty Customs duty on set-top Abolition or granting of No change on set-top boxes at 5%. moratorium. boxes and other equipment Infrastructure status for cable distribution sector Basic exemption Rs180,000/limit for individual tax payers Grant of infrastructure No change status.

Negative for media companies mainly DTH and cable operators.

Increased to Rs250,000/-

Increased to Rs200,000/- Slightly positive as the disposable income would increase.


17
March 16, 2012

Sharekhan

sharekhan budget special

right on intent, low on action

Oil & Gas


Issue Section 80IB for seven-year tax holiday for the refining business Import duty on petrol and diesel Current Status Expectation Announcement No announcement Impact Negative for the sector, we expect clarification from the oil ministry. Extension of last date for The exemption is eligibility for tax holiday currently available for only those refineries that for new refinery units. have been commissioned by March 2012. 2.5% on petrol and diesel. To maintain the current level.

No change

Neutral for the sector.

Import duty on Currently charged 5% on We do not expect any LNG and natural LNG and natural gas reduction. gas Price of petroleum products -

No change

Neutral for the sector.

Prices of diesel, kerosene, No announcement petrol and LPG cylinder expected to increase.

Negative for OMCs. However, we believe the prices of petrol and diesel will increase in the near term. Negative for oil exploring companies like RIL, ONGC, Oil India, Cairn India, Selan Exploration.

Cess leviable on Currently charged at Rs2,500 per metric tonne indigenous crude oil

Increased to Rs4,500 per metric tonne.

Subsidy sharing The government shares around 50% of the total under-recoveries.

Estimated fuel subsidy for Negative for the PSU FY2013 set at Rs43,580 upstream companies like crore. ONGC, Oil India and Gail. As the subsidy estimate of Rs43,580 crore (for government) could be less than 50% of the total underrecoveries in FY2013. Hence it may increase the burden of the PSU upstream companies and also affect marginally the OMCs. Oil and gas/LNG storage facilities and oil and gas pipeline sectors added as eligible sectors for viability gap funding under the scheme "Support to PPP in Infrastructure". Positive for GAIL, GSPL, IGL.

Oil and gas and LNG pipeline sectors become eligible under viability gap funding

Sharekhan

18

March 16, 2012

sharekhan budget special

right on intent, low on action

Power
Issue Current Status Expectation Abolition of the customs duty on thermal coal. Announcement Basic customs duty (5%) fully exempted and CVD cut from 5% to 1% on thermal coal till March 31, 2014. Also, full customs duty exemption for natural gas and LNG. Impact Positive: The market was expecting cut in customs duty on coal which was announced. Moreover, reduction in the CVD was a positive surprise. Further, the customs duty exemption extended to NG and LNG is also positive for the whole sector which is struggling (viability of some projects are also challenged) currently due to the high prices of imported fuel. Hence, such a move would be a positive for the entire sector. Positive: Given the execution delay in several coal mining (both Coal India and captive) projects, this could be an impetus. Likely positive for Coal India and Neyveli Lignite. Positive but factored in: a huge positive for several companies especially the independent power producers as it brings comfort of fuel availability for them. Companies that could benefit are CESC, Lanco Infra, Reliance Power, Adani Power, Indiabulls Power and of course NTPC. However, this was previously announced; hence it was factored in. Positive: This would help to improve funding for the sector. Positive for the whole power sector. Thermal coal, natural Customs duty and CVD cut on gas and LNG attract 5% customs duty thermal coal, natural gas and LNG

Customs duty exemption extended to coal mining projects and mining equipment

The customs duty Currently attracts exemption was not custom duty of 10% in expected. coal mining projects, 10% in mining machinery and 7.5% in surveying instrument

Customs duty exemption extended to coal mining projects. Also, customs duty on both machinery and instruments for surveying and prospecting of mines brought down to 2.5%.

The new projects were Instruction to dwindling due to Coal India to sign fuel supply shortage of fuel supply agreements (FSAs) for new power capacities

It was already announced Coal India advised to sign earlier; already factored FSAs with power plants, in. having long-term power purchasing agreements (PPAs) with distribution companies and getting commissioned on or before March 31, 2015.

Tax-free bonds of power sector

Rs10,000 crore allocated for the power sector out of tax-free bonds of Rs60,000 crore for financing infrastructure projects. ECBs to be allowed to part finance rupee debts of existing power projects. Also, withholding tax is reduced to 5% (plus applicable surcharge and cess) from 20% currently. The withholding tax change is also applicable to transmission and distribution companies apart from power generation companies.

Currently holds 20% Allow ECBs to withholding tax on part finance interest paid on ECB rupee debt or existing power projects and cut in withholding tax on ECBs

Withholding tax cut was not expected; though easing of ECB norms for existing power projects was expected.

Positive: Allowing ECBs to part finance rupee debts of the existing power projects could open a new window of funding. We read it as positive as several projects are facing strain on funding front and ECBs would be cheaper. Moreover, the cut in withholding tax could be more beneficial.

Contd...
Sharekhan

19

March 16, 2012

sharekhan budget special

right on intent, low on action

Power (contd...)
Issue Extension of existing incentives to the wind energy sector Current Status The wind energy sector gets both generationbased incentives (for independent power producers) and accelerated depreciation benefit (for captive users); but both will expire in March 2012. Expectation Both accelerated depreciation and generation-based incentive would be continued. Announcement No announcement in this regard. Impact Negative: Industry was expecting extension of the incentive for wind energy; however there is nothing offered to the sector, which could be a disappointment.

Pharmaceuticals
Issue Healthcare Current Status Expectation Announcement Impact Positive: This will strengthen the rural health infrastructure. Exemption for check-up expense will help healthcare services. Allocated Rs18,200 crore Increase in healthcare Allocation under NRHM in FY2012 under National allocation increased by 15% to Rs20,822 Rural Health Mission crore. Exemption up to (NRHM) Rs5,000 spent on preventive health check-up from income tax. Service tax at the rate of Reduction/Waiver of 10% is applicable on service tax on hospital and healthcare healthcare services. services. MAT rate at 18.5% Increase in MAT rate from 18.5% to 20% Service tax increased to 12% from 10% in general.

Service tax

Negative: Healthcare services would be costlier.

MAT rate

MAT rate to remain same for domestic companies. In addition, partnership firms, proprietorships etc would also be liable to AMT, if they enjoy the benefits under Chapter VI A of IT Act.

Negative: This will affect the companies having profits from partnership firms and enjoying benefits enshrined in chapter VI A of the IT Act. Therefore, units operating under partnership model in tax-free zones like Sikkim, Himachal Pradesh and NorthEastern states would be affected. Sun Pharma and Cadila Healthcare are some key players that would get adversely affected. Positive: Most of the frontline players have their profit making foreign subdiaries, which distribute profits to their holding companies in India. These companies will be benefited from this provision. Contd...

Currently 15% (1.66% Dividend distribution tax surcharge + education cess). (DDT)

Reduce the DDT to 10%

To maintain this rate for up to March 31, 2013. To remove cascading effects and allow repatriation of dividends from foreign subsidiaries of Indian companies to India at a lower tax rate of 15%.

Sharekhan

20

March 16, 2012

sharekhan budget special

right on intent, low on action

Pharmaceuticals (contd...)
Issue Extension of weighted deductions on R&D under section 35(2AB) Current Status Currently 200% of R&D expenditure is deducted from profits for in-house R&D activities. Expectation Extend these benefits to out-sourced R&D activities including contract research services. Announcement These provisions have been extended for next five years, ie up to FY2017. However, this continues to apply only to in-house R&D activities. Impact Neutral: No mention of outsourced R&D in budget is disappointing for pharma players, especially CRAMS players. Pharma companies will continue to enjoy the weighted deduction at the rate of 200% of expenditure done on in-house R&D activities.

Excise duty

Currently basic excise Reduce excise duty on Excise duty to increase to 12% Negative: Tax burden high for most of local pharma duty is of 5% for API to 5% (at par with for API and to 6% for players who manufacture formulation business. formulations and 10% on formulations). and sell formulations and bulk drugs. APIs in local market. Impact to be felt across the board. Specified medical equipment enjoy nil excise duty and customs duty of 5-10%. To reduce customs duty and excise duty on specified life saving drugs and medical equipment. A concessional import duty of 2.5%, basic customs duty with 6% CVD and nil for specified raw materials for the manufacture of syringes, needles, catheters etc and components of gloco-meters. Nil customs duty for steel tube & wire, cobalt chromium tubes used for stents. Positive: Players engaged in medical equipment will see higher competition. However, it is positive for Opto Circuits, which has manufacturing units outside India.

Waiver/ reduction of customs/excise duty on medical equipment

Sharekhan

21

March 16, 2012

sharekhan budget special

right on intent, low on action

Real Estate
Issue Interest subvention of 1% Current Status Interest subvention liberalised by extending the housing loan limit to Rs15 lakh and the cost of house to Rs25 lakh. NA Expectation Announcement Extended for one more year. Impact Positive: Will push demand in low-cost housing projects.

Affordable Housing

The rate of withholding tax on interest payments on ECBs has been reduced from 20% to 5% for three years for developing and building an affordable housing project. A deduction of 150% is now allowed on the capex for developing and building a housing project under a scheme for affordable housing framed by the central or the state governments.

Positive: Would now open up a new avenue for relatively cheap fund raising in affordable housing. Positive: This would help stimulate more investments in the mass housing segment.

SEZs

Service providers located in Domestic Tariff Areas (DTA) of SEZs allowed Cenvat credit. Matters pending in court. -

Cenvat credit rules to be allowed with retrospective effect from February 10, 2006.

Positive

Tax on renting of immovable property

Penalty waiver for those taxpayers Neutral as the matter is still who pay the service tax due on the pending. renting of immovable property (as on March 06, 2012) in full along with interest. This scheme of penalty waiver will be open only for a period of six months from the date of enactment of the Finance Bill, 2012. TDS of 1% on transfer of immovable property except agricultural land. Negative: The move aims to collect tax at the earliest point of time and also to have a reporting mechanism of transactions in the real estate sector thereby leading to greater transparency, but transaction costs will shoot up thereby pinching the end user. Negative for the real estate sector as now the funds from the sale proceeds have more options for investment as compared to the previous option of investing in real estate only. Negative: This would result in an increase in the cost to the end user as the cost of development will go up.

TDS

NA

Capital gains tax

Exemption in capital gains tax on sale of a residential property if proceeds invested in another property.

Exemption in capital gains tax on sale of a residential property, if the sale consideration is used for subscription in equity of a manufacturing small and medium enterprise (SME) company for purchase of new plant and machinery. Service tax rate increased from 10% to 12%.

Service tax

10%

Sharekhan

22

March 16, 2012

sharekhan budget special

right on intent, low on action

Retail
Issue Excise duty on branded apparels Current Status Mandatory levy of 10% excise duty on branded apparels with an abatement of 55% with effective tax incidence of 4.5% of MRP. Expectation To roll back the same or make it optional. Announcement In line with the increase in the general excise duty from 10% to 12%, the excise duty on branded apparel has increased as well. But the abatement for the same has also increased from 55% to 70%, thus bringing down the incidence on duty from the earlier 4.5% to 3.6% of MRP. Impact Marginally positive for apparel players like Pantaloon Retail, Shoppers Stop, Raymond, Provogue (India).

Industry status

Retail does not have an industry status. No FDI is allowed.

To grant retail an industry No announcement status. Some announcement or There was a reference for reference would be made. the need of FDI in retail in the speech with some assurance that consultation of states is being worked out. There was only a passing reference of constituting a GST network by August 2012. There has been no mention of a time line for actual implementation of the same. Unbranded jewellery has also been brought under the excise net with an imposition of excise duty of 1%. But the excise duty is to be charged on 30% of transaction value declared in the invoice. Increased to 10%.

FDI in multi brand retail

Neutral. Till the time a clear cut announcement is made and approval happens on this contentious issue, the sector is unlikely to benefit.

GST

Multiple taxation To bring about a clear-cut system, various state roadmap for levies and centre levies. implementation and rollout of GST.

Neutral to negative. That is because after the result of the UP state elections, expectations of big bang moves on policies like GST had already mellowed down.

Excise duty jewellery

Status quo At 1% for branded jewellery while unbranded jewellery is exempted from the same

Postive for branded players like Titan Industries and Gitanjali Gems as it brings a level playing field between branded and unbranded jewellery.

Excise duty on gold jewellery sold from EOUs to DTAs Customs duty on gold bars, coins and platinum bars

Duty at 5%.

Status quo.

Negative for players like Gitanjali Gems and Rajesh Exports. Negative for jewellery players like Titan Industries whose ~20% of jewellery sales come from gold bars and coins.

Duty at 2%.

Status quo.

Increased from 2% to 4%.

Customs duty Duty at 0% on polished/ coloured stones

Status quo

Brought under the custom Negative for jewellery net at 2%. players like Titan Industries, Gitanjali Gems and Rajesh Exports whose 25% jewellery sales comprise of diamonds and other stones.

Sharekhan

23

March 16, 2012

sharekhan budget special

right on intent, low on action

Telecom
Issue Current Status Expectation Status quo Announcement Viability gap funding for telecom towers has been allowed. Impact Positive for tower companies and players having exposure in tower companies. Negative for Bharti Airtel and Idea Cellular. The overall budgeted receipt of Rs40,000 crore implies seriousness of the government towards spectrum auction and charging on excess spectrum, which is likely to put pressure on the incumbent players like Bharti and Idea. Positive for mobile phone players and the sector as the manufacturing cost for mobile phones would come down. Not allowed Viability gap funding for telecom towers

Spectrum sale receipt

It was known that the money raised through the auction of spectrum would be budgeted in the non-tax receipt of the budget estimates.

Around Rs40,000 crore has been budgeted as there would be money received from the auction of spectrum (of 122 licences quashed by the Supreme Court) coupled with one time spectrum charge to be paid by players holding excess spectrum beyond 6.2 MHZ.

Mobile phone parts

Basic customs duty is levied.

Status quo

Exemption of mobile phone parts from the basic customs duty.

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Disclaimer This document has been prepared by Sharekhan Ltd.(SHAREKHAN) This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or any other use is prohibited. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (SHAREKHAN and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance only and is not intended to be and must not alone betaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. Any comments or statements made herein are those of the analyst and do not necessarily reflect those of SHAREKHAN.

Sharekhan

24

March 16, 2012