Giving relief to the industry reeling under the impact of slowdown, the Government reduced Excise Duty and Service Tax rates by 2% each.
While the general Excise Duty has been reduced from 10% to 8%, the rate of Service Tax has been cut from 12% to 10%. The 4% Excise Duty cut announced earlier in the stimulus package in December 2008 will now continue beyond 31 March 2009.
We believe the tax rate cut is a welcome relief for the manufacturing and the services sectors of the economy, which are witnessing challenging times.
These two segments of the Indian economy combined contribute to almost 80% of the country’s GDP.
Notably, while the government had refrained from making any announcements in the Interim Budget and had also indicated earlier of no further measures on the stimulus front, the current moves are more-or-less in the form a third stimulus package, this time benefiting a wider range of sectors.
Also, the reduction in Service Tax will put additional income in the hands of the consumer.
However, the impact of these, either to prop up consumer demand or to the economy at large, is limited.
While we believe that the additional 2% Excise Duty cut would be passed onto the consumers, the various sectors that stand to gain from the 2% Service Tax cut, though only in limited capacity, include multiplex / retail, media television, oil and gas, real estate, telecom and commercial vehicles.
While the tax sops may help in stimulating the demand to an extent, the fiscal repercussions can be quite daunting.
Already, the government of India anticipates a fiscal deficit of Rs3.27 lakh crore (6% of gross domestic product [GDP]) during FY2009—much higher than the original estimate of Rs1.33 lakh crore (2.5% of the GDP).
The measures announced today imply further pressure on tax collections, which are already moderating as economic activity is slowing down.
Owing to the worsening fiscal position S&P has already downgraded its outlook on Republic of India to ‘negative’ from ‘stable’ earlier while affirming BBB- long-term credit rating, the lowest level in the investment grade.
In light of the fresh tax sops, further review of India’s sovereign rating cannot be ruled out.
Cement is a heavily taxed commodity and industry was lobbying for a reduction or rebates in taxes.
In a move to give relief to the industry impacted by slowdown and help revive the economy, government has announced reduction in the excise duty on bulk cement to 8% or Rs230 per tonne whichever is higher and further extension of 4% reduction in cenvat beyond March, 2009.
This move is expected to result in reducing the prices in the bulk cement category to the extent of Rs 60 per tonne.
Though cement demand is inelastic to cement prices, but this move, indirectly, is expected to reduce the cost of construction of large-scale infrastructure projects and can have an indirect impact on the cement demand.
We continue to maintain our estimates for the companies since benefit of reduction in excise duty is expected to be passed on to the end users.