Deduction in export profits under section 10A and 10B extended till 2010-11. The scheme to provide enhanced Export Credit and Guarantee Corporation (ECGC) cover at 95% has been extended up to March 2010. Interest subvention of 2% on pre-shipment credit for small and medium enterprises (SMEs) extended to 31 March 2010. No proposals for tyre sector.
The Budget will not have any significant impact on the auto components and tyre industry. Extension of the tax holiday for 100% export-oriented units (EOUs) will benefit only those few players with established EOUs. The interest subvention of 2% will have a marginally positive impact on SMEs engaged in export of auto components. The ECGC cover extension until March 2010 will protect exporters against risk of payment defaults.
India Infrastructure Finance Co. Ltd (IIFCL) to evolve a “takeout” financing scheme and refinance 60% of bank loans for public-private partnership (PPP) projects.
The increased thrust on PPP projects and funding support by IIFCL could favourably affect the pace of development of airport infrastructure. However, the extent to which long-term finances become available for the sector is uncertain at this stage. The abolishment of the fringe benefit tax that was levied on some of the operational expenses of the airlines such as expenses for the crew, hotel accommodations for the passengers in case of delays and cancellations etc., would reduce costs for airlines.
Capital goods / Engineering
Allocation for schemes in power and infrastructure sector as well as housing projects/schemes hiked. Long-term refinancing facilities for infrastructure projects. Duty on ferromagnets for windmills above 0.5MW capacity lowered. Customs duty on concrete batching plants up from nil to 7.5%
Increased allocation and long-term funding availability for power and infrastructure projects will induce more investment in these sectors and thereby benefit equipment manufacturers, especially electric equipment and construction equipment manufacturers. Higher allocation for rural electrification and transmission and distribution reforms will benefit equipment manufacturers and contractors operating in this space. Lower import duty on ferromagnets will benefit wind turbine manufacturers while increased duty on batching plants will benefit manufacturers in this segment .
Auto / Two-wheeler
Specific component of the excise duty on large passenger cars and utility vehicles cut from Rs20,000 per vehicle to Rs15,000. Excise duty on petrol-driven trucks lowered from 20% to 8%. Excise on chassis of such trucks reduced from “20% plus Rs10,000” to “8% plus Rs10,000”. Allocation for National Highways Authority of India (NHAI) up 23%.
Higher investment in NHAI/infrastructure is a significant positive for the commercial vehicles segment. Another positive is the retention of excise duty cuts provided as part of the stimulus package. The reduction in ad valorem component by Rs5,000 per vehicle is unlikely to have significant impact on manufacturers of large passenger vehicles. Lower excise duty on petrol-driven trucks is a positive but given the small base, it may not have a material impact.
Banking / NBFC / Housing finance
Banks, insurance firms to remain in the public sector and be given support including capital infusion. India Infrastructure Finance Co. Ltd (IIFCL) to refinance 60% of bank loans for public-private partnership infrastructure projects. Agriculture credit targets raised by 12.5% to Rs3.25 trillion. Interest subvention on short-term crop loans to continue. Higher allocation to National Housing Bank for rural housing refinance and Small Industries Development Bank of India for micro and small enterprises.
Widening fiscal deficit and corresponding impact on bond yields will have a negative impact. The government’s commitment to recapitalize banks is a positive. The refinancing facility from IIFCL could help correct asset-liability management mismatches arising on long-duration exposures. The additional interest rate subvention scheme to encourage prompt repayment.
No direct proposals
There is no significant proposal for the cement sector. However, the increase in outlay on schemes like Bharat Nirman and focus on infrastructure development should boost demand for cement. In particular, the increase in allocation under the National Rural Employment Guarantee Scheme will boost rural demand including demand for rural housing, which has been a key demand driver for cement in the recent past.
Funding support for public-private partnership infrastructure projects in critical sectors by refinancing up to 60% through India Infrastructure Finance Co. Ltd over the next 15-18 months. Allocation under Jawaharlal Nehru National Urban Renewal Mission raised by 87% to Rs 12,890 crore. Exemption from Central excise tariff for prefabricated concrete blocks.
The increased outlay is marginally positive for the industry and will lead to an 18% growth in construction expenditure in infrastructure in 2009-10. Financing support will ease funding pressure on construction companies and attract more participation, especially for build-own-transfer projects. Excise duty reduction will result in minor improvement in construction players’ margins.
Electricity / Power
Significant increase in allocation under the Accelerated Power Development and Reform Programme (APDRP) and the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). Benefits extended under section 80 IA till March.
Increased allocation for APDRP may result in loss reduction for the state sector utilities, which would have a positive impact on all players. Increased allocation for RGGVY will boost rural demand. Creation of a gas grid and incentives for natural gas sector will improve fuel availability for gas-based power plants in the long term. Long-term refinancing will boost funding for the sector while extension of section 80 IA benefits will benefit power projects commencing operations by 31 March. But the increase in the minimum alternate tax from 10% to 15% is a negative—it will hit profitability of merchant power plants. While tax burden on firms working in the cost plus or tariff bid based environment will be a pass-through, it will increase tariff burden on the consumer.
Drugs / Pharmaceuticals
Customs duty on certain life-saving drugs to be reduced to 5% from the current 7.5-10%.
Increase in minimum alternate tax (MAT) to adversely impact facilities located in tax-free zones
The reduction in customs duty from 10% to 5% and countervailing duty exemption (by virtue of excise exemption) for influenza vaccine and specified life-saving drugs (including bulk drugs used for these) will bring down the cost of medicines and benefit patients. Similarly, reduction in customs duty from 7.5% to 5% on two specified life-saving devices used in the treatment of heart conditions will largely benefit patients. The abolition of the fringe benefit tax will result in tax savings for companies. However, the increase in MAT may result in a higher tax outgo for companies located in tax-free zones.
Subsidy regime has moved towards a nutrient-based one instead of a product-based one. The Budget seeks a thrust to agriculture for an annual rate of growth of 4%.
Clarity required on how the nutrient-based subsidy scheme will be made applicable for the different segments of the industry; by and large, scheme should favour efficient producers. Long-term goal of directly subsidizing farmers could be difficult to implement. Nevertheless, the statement is an expression of intention to decontrol the industry and should be positive for efficient producers. Subsidy allocation for 2009-10 should be sufficient. Overall, the thrust on agriculture should lead to increased demand for fertilizers.
Hotels / Tourism
The allocation for the 2010 Commonwealth Games has been increased by around 64%, from Rs2,112 crore to Rs3,472 crore.
Higher investment in road infrastructure could have a trickle-down effect in promoting travel and tourism. The higher spending on the Commonwealth Games is to help showcase India as a key Asian tourist destination and help attract foreign travellers. The elimination of the fringe benefit tax will directly benefit hotel companies through reduced tax outflow and indirectly by driving higher corporate spending on employee travel and boarding.
Tax exemption currently under sections 10A and 10B has been extended by a year till March. However, the minimum alternate tax (MAT) rate has been increased from 10% to 15% while the fringe benefit tax (FBT) has been scrapped.
The extension of tax exemption by a year will have a positive effect on the industry, wherein tier II players would relatively benefit more than the tier I players. The elimination of FBT will benefit the industry marginally. However, the increase in MAT rate will offset the above benefits, resulting in a marginally negative impact for the industry. The negative impact of MAT will be higher for tier II players than for tier I players.
The allocation of funds for rural, agricultural-centric and employment generation schemes has been increased. Excise duty of 4% has been retained for certain food items, including biscuits, sharbats, cakes and pastries.
The thrust on the rural economy and employment generation is a positive for the sector, since such schemes are expected to increase consumer spend. The reduction in personal income tax will benefit the sector by increasing available surplus with consumers. The scrapping of the fringe benefit tax is also a positive, given its significant impact on consumer product companies.
Allocation of Rs3,973 crore for housing and provision of basic amenities to urban poor under the Basic Services to the Urban Poor sub-mission of the Jawaharlal Nehru National Urban Renewal Mission. This includes a provision for Rajiv Awas Yojana, a new low-cost housing scheme. Allocation under Indira Awaas Yojana increased by 63% to Rs8,800 crore. Rs2,000 crore allocated to rural housing fund in the National Housing Bank to boost its resource base.
The proposals will help provide affordable housing to economically weaker sections and low-income groups, and will also help improve the shortage in rural housing. The organized housing sector, however, will not be impacted.
Media / Entertainment
Customs duty on set-top boxes has been increased from nil to 5%. The waiver of the 15% agency commission and 10% increase in rates (subject to caveats) on Directorate of Advertising and Visual Publicity advertisements in print, and exemption of customs duty on newsprint provided in the fiscal stimulus has been extended till December 2009.
The impact on the sector is neutral. The increase in customs duty on set-top boxes is expected to boost domestic manufacturing of set-top boxes. However, the move will also increase the subsidies ranging from Rs125 to Rs250 per set-top box by digital pay TV operators and, hence, will marginally impact their margins, based on their ability to pass on the increase in cost.
No change in customs and excise duty.
Customs as well as Central value-added tax (Cenvat) duties remain unchanged resulting in a neutral impact on the non-ferrous metals industry. However, with the government’s proposal to increase allocations to the Accelerated Power Development and Reform Programme by 160% to Rs2,080 crore for 2009-10 and rural electrification scheme by 27% to Rs7,000 crore, the demand for aluminium from the power sector (40-45% of the total aluminium demand) will be positively impacted.
The excise duty on naphtha has been reduced from 16% to 14%. No changes were announced in the excise and custom duties in the Budget.
The overall impact of Budget 2009-10 on the domestic petrochemicals industry is neutral, with no changes announced in the excise and customs duties. However, for naphtha-based crackers, the reduction in the excise duty on naphtha is expected to have a marginally positive effect.
A clear road map has been prepared for implementing the goods and services tax (GST) with effect from 1 April. “Cold chain” and warehousing facilities for storing agriculture produce have been given a new investment-linked tax incentive.
Clearing the way for the introduction of GST will eventually streamline the pricing divide between the organized sector and the unorganized one. India’s organized retail industry is currently in a nascent stage, requiring significant investments in back-end infrastructure and effective logistics management. Extension of investment-linked tax incentives in the area of “cold chain” and warehousing facilities for agriculture produce would facilitate necessary investments and help organized retail improve efficiencies and profitability in the long term.
Oil and gas
Panel to be set up on a viable and sustainable system of pricing petroleum products. The Centre will develop a blueprint for long-distance “gas highways” for a national gas grid. Investment-linked tax incentives for laying and operating cross-country pipelines. Section 80 IB (9) of the Income-tax Act extended to natural gas.
The formation of an expert group on pricing policy is a positive development. A national gas grid should benefit gas transmission companies, city gas distribution firms, pipeline manufacturers and pipeline contractors. The investment allowance should lead to lower pipeline tariff. Extension of the tax holiday for natural gas producers should help incumbent exploration and production firms as well as prospective entrants.
Overall allocation for programmes such as the Rajiv Awas Yojna (RAY) and the Indira Awaas Yojna (IAY) is increased. Further, the National Housing Bank is to be allocated Rs2,000 crore for a rural housing fund.
Overall, the Budget did not contain any of the concessions that the sector was looking for. But an increased outlay for RAY and IAY could favourably impact the slum rehabilitation schemes as well as boost demand for affordable housing projects in rural India.
Roads and ports
The National Highways Authority of India (NHAI) as well as other social sector programmes such as the Pradhan Mantri Gram Sadak Yojana (PMGSY) have seen significant increase in allocation. Also, India Infrastructure Finance Co. Ltd (IIFCL) is to evolve a takeout financing scheme and refinance 60% of commercial bank loans for public-private partnership projects. The minimum alternate tax (MAT) has been raised from 10% to 15%; however, the time period for carrying forward the tax credit under MAT has been extended to 10 years from seven.
The increased outlay under NHAI and PMGSY would have a favourable impact on road construction firms. Financing through IIFCL would give access to long-term capital. The increase in MAT would have an adverse effect owing to the long gestation period for such projects.
The Budget has proposed the development of a blueprint for a long-distance “gas highway”, and extension of section 80 IB(9) to the natural gas sector. There is also a significant increase in the outlay on rural housing and urban infrastructure.
The proposals for some key infrastructure sectors are likely to positively affect steel demand in the country. The fillip provided to the natural gas sector through an income-tax holiday and blueprint for a national gas grid would encourage investments in pipelines for gas transportation, increasing steel demand. Similarly, the focus on the development of highways, besides leading to an additional demand for construction steel, is also likely to benefit the commercial vehicle sector and, thus, the steel sector. Higher outlays in urban infrastructure and rural housing, too, would result in higher demand for steel.
Interest subvention of 2% on pre-shipment and post-shipment export credit extended beyond 30 September 2009 till 31 March 2010. Optional excise duty of 4% on cotton textiles chain (beyond fibre stage) reinstated from earlier across-the-board cut of 4%; this will restore option to manufacturers for availing export rebate of duty paid from Central value added tax credit. Duty on manmade fibre and yarn increased from 4% to 8%; duty on stages beyond fibre, yarn increased from 4% to 8%; similar duty increase on intermediates.
The extension of interest subvention will benefit exporters through lower interest costs on working capital loans. Restoration of the optional excise duty on the cotton textiles chain has a negligible impact. However, the increase in duties for the manmade fibre/yarn industry is negative.
The Budget has extended the exemption from special additional duty of customs on components and accessories of mobile handsets (including cell phones), for a period of one year. While the government has proposed the abolishment of the fringe benefit tax (FBT), the minimum alternate tax (MAT) has been increased from 10% to 15%.
The impact is marginally negative. The exemption from special additional duty on components and accessories of mobile handsets maintains the user’s affordability to access mobile services. However, the increase in MAT will more than offset the benefit arising from the reduction in FBT, and negatively impact cash flows of telecom services players.