Business Environment

Business Environment Budget 2013-2014 Analysis

Prepared By: Neeraj Kumar Jha EX-PGDM 2012-13 PRN No: 12020468014

The government's reform momentum had been so strong since September that there were expectations of some exciting measures in the budget too. That was not the case, but it does not mean the budget was a disappointment. The FM has been seriously committed to bringing down the fiscal deficit and he has delivered on that front. He did not announce any major populist measure and largely maintained stability in tax policies save for some tweaking for higher income brackets and corporate. The government has seriously committed to increasing diesel prices to more or less market prices and that has created much more space in the FY2014 budget to once again restore planned spending. An increase of almost 30 per cent in plan expenditure, with a more than 45 per cent increase in rural expenditure alone, will lead to a more stimulatory spending mix which should be good for GDP growth. Probably one of the misses of the budget was that there wasn't any major stimulus measure to revive exports, which are reeling over the last several quarters and have contributed to a massive current account deficit run rate of 5 per cent.

Key Features of Budget 2013-2014 1. Getting back to potential growth rate of 8 percent is the challenge facing the country. 2.

Slowdown in Indian economy has to be seen in the context of slowing global economic growth from 3.9% in 2011 3.2% in 2012.However, no reason for gloom or pessimism. Of the large countries of the world only China and Indonesia growing faster than India in 2012-13. In 2013-14, only China projected to grow faster than India.

3.

Between 2004 and 2008, and again in 2009-10 and 2010-11 the growth rate was over 8% and crossed 9% in four of those six years.

4. 11th Plan period had average growth rate of 8 percent, highest during any Plan period,entirely under the UPA Government. High growth rate can again be achieved through cooperation. 5. ‘Higher growth leading to inclusive and sustainable development’ to be the mool mantra. 6. Government believes in inclusive development with emphasis on improving human development indicators especially of women, the

scheduled castes, the scheduled tribes, the minorities and some backward classes.

Fiscal Deficit, Current Account Deficit and Inflation The purpose of Budget (2013-2014) is to create economic space and find resources to achieve the objective of inclusive development. Government made announcement of new fiscal consolidation path with fiscal deficit at 5.3% of GDP this year and 4.8% of GDP in 2013-14. Foreign investments are in an imperative in view of the high current account deficit (CAD). Three main source of CAD Financing are TFII, FDI and ECB. Foreign investment that is consistent with economic objectives is to be encouraged. Efforts in the past few months have brought down headline WPI inflation to about 7 per cent and core inflation to about 4.2%. All possible steps are taken by government to augment the supply side to crab the high Food inflation. Faced with huge fiscal deficit, Government expenditure rationalized in 201213.

The plan and budgetary allocations Revised Estimates (RE) of the expenditure in 2012-13 was at 96 per cent of the Budget Estimates (BE) due to slowdown and austerity measures. During 2013-14, BE of total expenditure of 1665297 crore and of Plan Expenditure at 555322 crore. Plan Expenditure in 2013-14 will grow at 29.4 per cent, over Revised Estimates for the current year. All flagship programs fully and adequately funded and sufficient funds provided to each Ministry or Department consistent with their capacity to spend funds. Budget for 2013-14 to have one overarching goal of creating opportunities for youth to acquire education and skills that will get them decent jobs or self employment. SC, ST, Women and Children Allocations for Scheduled Caste Sub Plan and Tribal Sub Plan increased substantially over the allocations of the current year. Funds allocated to these Sub Plans cannot be diverted. 97,134 crore allocated for programs relating to women and 77,236 crore allocated for programs relating to children. Ministry of Women and Child Development is to design the schemes that will address the concerns of women belonging to the most vulnerable groups, including single women and widows. An additional sum of 200 crore proposed to be provided to the Ministry to begin work. Minorities An increase of 12 per cent over the BE and 60 per cent over the RE of 2012-13 to Ministry of Minority Affairs.

The allocation table under gives the amount of money portioned to the various sectors in this 2013 – 2014 Union Budget Sector disability affairs department NISC National Institute of Sports Coaching Eastern Indian states rice manufacturing New women’s bank water purification system AIIMS medical institutes Agricultural reports affairs of minority Medical Study NABARD to form cold storages & godowns Space Dept. atomic power & energy Diversification of Crop Dept NFSB National Food Security Bill Backward Sections Mid-day noon meal program Water & Sanitation Section children allocation Infrastructure stock bonds SSA aka Sarva Shiksha Aviyan SSA education Tribal welfare Health & Medicine MNREGA welfare of the SC Rural dev projects Defense & Military States & Union Territories credit schemes for the agriculturists Various programs Crop diversification

Amount In INR crores 110 253 1000 1000 1400 1650 3400 3511 4727 5000 5400 5600 9954 10000 11500 13215 15269 17700 25000 27257 27258 28500 33000 33000 41000 80194 220000 580000 700000 9954 & 2250

Tax proposals Underlying theme of tax proposals this year is Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution and independent judiciary for greater assurance. Commission will be set up for Tax Administration Reforms.

DIRECT TAXES Little room is to give away tax revenues or raise tax rates in a constrained economy.

No case to revise either the slabs or the rates of Personal Income Tax. Even a moderate increase in the threshold exemption will put hundreds of thousands of Tax Payers outside Tax Net. However, relief for Tax Payers in the first bracket of “2 lakhs to 5 lakhs” is granted. A tax credit of 2000 is given for every person who has total income up to 5 lakhs. A Surcharge of 10 percent levied on persons (other than companies) whose taxable income exceed 1 crore to augment revenues. Surcharge increased from 5 % to 10% on domestic companies whose taxable income exceed the 10 crore. In case of foreign companies who pay a higher rate of corporate tax, surcharge to increase from 2 to 5 percent, if the taxabale income exceeds Rs10 crore. In all other cases such as dividend distribution tax or tax on distributed income, current surcharge increased from 5 to 10 percent. Additional surcharges to be in force for only one year. Education cess is to continue at 3 percent. Permissible premium rate increased from 10 percent to 15 percent of the sum assured by relaxing eligibility conditions of life insurance policies for persons suffering from disability and certain ailments. Contributions made to schemes of Central and State Governments similar to Central Government Health Scheme, eligible for section 80D of the Income tax Act. Donations made to National Children Fund eligible for 100 percent deduction. The manufacturing companies who are investing more than 100 crore in plant and machinery during the period 1.4.2013 to 31.3.2015 will get Investment allowance at the rate of 15%. ‘Eligible date’ for projects in the power sector to avail benefit under Section 80- IA extended from 31.3.2013 to 31.3.2014. Concessional rate of tax of 15 percent on dividend received by an Indian company from its foreign subsidiary proposed to continue for one more year. Securitisation Trust to be exempted from Income Tax. At the time of distribution of income for companies, individual or HUF etc. tax to be levied at specified rates only. No further tax on income received by investors from the Trust. Investor Protection Fund of depositories exempt from Income-tax in some cases. Parity in taxation between IDF-Mutual Fund and IDF-NBFC proposed. A Category I AIF set up as Venture capital fund allowed pass through status under Income-tax Act.

TDS at the rate of 1 percent on the value of the transfer of immovable properties proposed where consideration exceeds `50 lakhs. Agricultural lands are exempted from TDS. A final withholding tax at the rate of 20 percent on profits distributed by unlisted companies to shareholders through buyback of shares proposed. Increase in rate of tax on payments by way of royalty and fees for technical services to non-residents from 10 percent to 25 percent Proposed. Reductions made in rates of Securities Transaction Tax in respect of certain transaction. Proposal to introduce Commodity Transaction Tax (CTT) in a limited way. Agricultural commodities will be exempted. Modified provisions of GAAR will come into effect from 1.4.2016. Rules on Safe Harbor will be issued after examining the reports of the Rangachary Committee appointed to look into tax matters relating to Development Centers & IT Sector and Safe Harbour rules for a number of sectors. A number of administrative measures such as extension of refund banker system to refund more than 50,000, technology based processing, extension of e-payment through more banks and expansion in the scope of annual information returns by Income-tax Department.

Indirect Taxes No change in the normal rates of 12 percent for excise duty and service tax. No change in the peak rate of basic customs duty of 10 perent for nonagricultural products. Customs Period of concession available for specified part of electric and hybrid vehicles extended up to 31 March 2015. Duty on specified machinery for manufacture of leather and leather goods including footwear reduced from 7.5 to 5 percent. Duty on pre-forms precious and semi-precious stones reduced from 10 to 2 percent. Export duty on de-oiled rice bran oil cake withdrawn. Duty of 10 percent proposed on export of unprocessed ilmenite and 5 percent on export on ungraded ilmenite. Concessions to air craft maintenance, repair and overhaul (MRO) industry. Duty on Set Top Boxes increased from 5 to10 percent. Duty on raw silk increased from 5 to 15 percent.

Duties on Steam Coal and Bituminous Coal equalized and 2 percent custom duty and 2 percent CVD levied on both kinds coal. Duty on imported luxury goods such as high end motor vehicles, motor cycles, yachts and similar vessels increased. Duty free gold limit increased to ` 50,000 in case of male passenger and `1,00,000 in case of a female passenger subject to conditions. Excise duty Relief to readymade garment industry is provided. In case of cotton, zero excise duty will be levied at fiber stage. Also In case of spun yarn made of manmade fiber, duty of 12 percent at the fiber stage will be levied. Handmade carpets and textile floor coverings of coir and jute totally exempted from excise duty. To provide relief to ship building industry, ships and vessels exempted from excise duty. No CVD on imported ships and vessels. Excise duty on cigarettes increased by about 18 percent. Similar increase in tax proposed for cigars, cheroots and cigarillos. Excise duty on SUVs increased from 27 to 30 percent. Not applicable for SUVs registered as taxies. Excise duty on marble increased from `30 per square meter to ` 60 per square meter. Proposals to levy 4 percent excise duty on silver manufactured from smelting zinc or lead. Duty on mobile phones priced at more than `2000 raised to 6 percent. MRP based assessment in respect of branded medicaments of Ayurveda, Unani, Siddha, Homeopathy and bio-chemic systems of medicine to reduce valuation disputes. Service Tax Maintain stability in tax regime. Vocational courses offered by institutes affiliated to the State Council of Vocational Training and testing activities in relation to agricultural produce also included in the negative list for service tax.

Exemption of Service Tax on copyright on cinematography limited to films exhibited in cinema halls. Proposals to levy Service Tax on all air conditioned restaurant. For homes and flats with a carpet area of 2,000 sq.ft. or more or of a value of `1 crore or more, which are high-end constructions, where the component of services is greater, rate of abatement reduced from from 75 to 70 percent. Out of nearly 17 lakh registered assesses under Service Tax only 7 lakhs file returns regularly. Need to motivate them to file returns and pay tax dues. A onetime scheme called ‘Voluntary Compliance Encouragement Scheme’ proposed to be introduced. Defaulter may avail of the scheme on condition that he files truthful declaration of Service Tax dues since 1st October 2007. Tax proposals on Direct Taxes side estimated to yield to `13,300 crore and on the Indirect Tax side `4,700 crore. Good and Services Tax A sum of `9,000 crore towards the first installment of the balance of CST compensation provided in the budget. Work on draft GST Constitutional amendment bill and GST law expected to be taken forward.

Sectors wise review Banks: The Union Budget extended the interest subvention scheme on short term crop loans to private sector banks (which hitherto was available to PSU banks, cooperative banks and RRBs) which will bring such banks on parity and encourage them to lend in these segments. However, it remains to be seen whether they will actually lend, considering the risks of high NPAs in such loans. In light of capital constraints being faced by most of the PSU banks and the imminent implementation of stiffer Basel-III norms from 1 April 2013, an infusion of Rs 14,000 crore in PSU banks, which was on expected lines, will be positive for PSU banks with low capital adequacy. From the fiscal deficit point of view, despite being a pre-election budget, the government refrained from having any significant populist measures and the market borrowings numbers came largely on the expected lines. There was an expectation that the budget this time will introduce measures to encourage savings into financial instruments, but the budget disappointed on these fronts.

Infrastructure: The announcements such as a. Issuance of tax-free bonds through various institutions for financing infrastructure projects has been proposed at Rs 50,000 crore in FY2013-14

b.

The road project worth 3,000 kms from various states such as Gujarat, Maharashtra, Rajasthan, Madhya Pradesh, Rajasthan and Uttar Pradesh to be awarded in 1HFY2014

c. Allocation for Ministry of Drinking Water and Sanitation in FY2013-14 is being stepped up by 17.4 per cent to Rs 15,260 crore

d. Provision for Delhi Mumbai Industrial corridor (DMIC) additional funds during FY2013-14, on the basis of requirement were made in the budget. All these measures are positive for infrastructure. The implementation remains the key as infrastructure companies continues to face persistent headwinds such as slower-than-anticipated revival in industrial capex, environment clearances, and high interest rate and land acquisition issues. Oil & Gas: The budget was positive for the oil & gas sector. The government aims to provide clarity on natural gas pricing which needs to be aligned to the international prices. There will be revenue sharing model for gas projects (learning from KG D6 experience) which would encourage exploration. At the same time it will align government's interests in line with corporate. The government plans to come out with a policy on share gas exploration and production. All these measures are positive for oil explorers and producers such as Reliance Industries, ONGC, Cairn India and Oil India over the medium to long term. Automobile: No hike in excise duty was in-line with expectations. The government hiked excise duty for non-taxi SUV's to 30 per cent from the current rate of 27 per cent. It will be marginally negative for Mahindra and Mahindra and Tata Motors. (Models impacted - Mahindra and Mahindra: Scorpio, Xylo, XUV5OO and Bolero/ Tata Motors: Safari, Safari Storme, Sumo, Sumo Grande and Aria). Tata Motors and Ashok Leyland are likely beneficiaries of government's plan to purchase of 10,000 buses under JNNURM.

FMCG: The Union Budget increased the allocation to rural development programs by 46 per cent. This is favorable for FMCG players like, HUL, Dabur, Marico etc as it would increase income in the hands of rural consumers. Tax on cigarettes has been increased by 18 per cent. Cigarette makers have in the past exhibited ability to increase prices whenever there is hike in excise duty. Thus the hike is not expected to impact the profitability of cigarette makers like ITC although it might affect volumes in the near term. Cement: The government has announced an additional income tax deduction of Rs 100000 towards interest for home loans up to Rs 2500000 taken in 2013-14. This move is positive for the cement sector as it is expected to favor cement demand. Uniform customs duty for steam and bituminous coal is positive for cement companies as cost of generating captive power would be cheaper. Information Technology: The Union Budget 2013-14 was a non-event for the IT sector. Apart from measures related to investments in improving the quality of education, the Budget did not outline any impact on the sector. IT-related education companies are expected to benefit from the increased allocation of funds for education, total of Rs 65,867 crore, up 17 per cent from last year, as it will boost business opportunities in ICT and vocational segments. The plan allocation for elementary education under the Sarva Shiksh Abhiyan increased to Rs 27,258 crore from Rs 25,555 crore last year. This move is positive for companies such as NIIT, Educomp, Everonn etc. Metals & Mining: The budget was a non-event for the metals & mining sector. Except that Coal India will go for PPP (private public partnership) to raise production, there was nothing much announced to boast about. Capital Goods: High value investments (greater than Rs 100 crore) in plant and machinery, between 1st April 2013 and 31st March 2015, will be eligible for deduction of investment allowance of 15 per cent of the total investment. This will be in addition to the current rates of depreciation. Impact: It would encourage companies to revive stalled projects and make new investments. It is positive for all companies in the capital goods sector. Power: Extension of tax exemption under Section 80-IA for power generation companies until FY2014 was announced. As per the section, power plants are eligible for a tax holiday of 10 years from the year of commissioning of the plants. The exemption was applicable to power plants commencing operations before FY2013 and has now been extended until FY2014. It will have positive impact on power generation companies.

Proposed generation based incentive for wind energy projects and allocation of Rs 800cr to the Ministry of Non Renewable Energy will be positive for wind power generators such as Orient Green and Indowind Energy. Media: The government proposes to add 839 new FM radio channels covering 294 cities. It will be auctioned in 2013-14, a move which will be positive for radio operators such as ENIL. Custom duty on set top boxes (STB), increased from 5 per cent to 10 per cent, is positive for domestic STB manufacturers. However, it is negative for cable and DTH operators such as Dish TV as they mostly import STBs.