Decoding The Fine Print
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Many expectations of the automobile sector have been belied in this budget. It is hoped that there are further positive and growth-oriented measures coming up to enable the industry rise to global challenges.
Direct tax deduction for in-house research
Specific component of excise duty on large cars/utility vehicles to be reduced from Rs 20,000 per vehicle to Rs 15,000 per vehicle.
Excise duty on petrol-driven trucks/lorries to be reduced from 20 per cent to 8 per cent. Excise duty on chassis of such trucks/lorries to be reduced to 8 per cent plus Rs 10,000.
Thrust on rural spending and infrastructure development will benefit demand for tractors and trucks/lorries, which will also benefit original equipment manufacturers.
Reduction in specific additional duty on passenger car and utility vehicles will result in a negligible impact on demand.
The continued focus on rural development and increase in basic exemption limit in income-tax slabs for individuals may have a positive impact on two-wheeler sales.
Increased spending by state transport undertakings will bring cheer to bus manufacturers such as Tata Motors and Ashok Leyland.
A slumdog millionaire's budget, it gave further credence to the fact that it is the rural economy and rural markets that would drive future growth.
Provisions And Impact:
Public sector banks and insurance to remain in public sector. C
These indicate that all kinds of support, including capital support would be forthcoming in the hour of need. Industry level CARs are to be sustained.
India Infrastructure Finance Co. (IIFCL) to finance 60 per cent of commercial bank loans for public-private partnership (PPP) projects. C
Banks have been chary of financing infrastructure loans, due to asset-liability management mismatches and pricing issues. This should encourage them.
Interest subsidy on bank loans for higher education. C
With constrained demand for consumer loans, this could nudge more higher education aspirants to borrow from banks in larger trenches.
Special fund of Rs 4,000 crore to boost bank lending to SMEs. C
Banks can take heart from this measure and provide much-needed credit to the SMEs. Banking networks to be expanded substantially. C
Scheduled commercial banks can set up offsite ATMs. C
It clearly indicates that financial inclusion is a priority area, and banks need to increase reach of services to tier III and IV locations through virtual networks.
Unique identification (UID) project a major step towards corporate governance. C
Such a number for every citizen will make fulfilment of know-your-customer/anti-money laundering requirements, opening of ‘no frills' accounts, more amenable and efficient.
The government has a long way to go if public spending in healthcare has to reach 3 per cent of GDP from the current 1 per cent.
Provisions And Impact:
Allocation under National Rural Health Mission (NRHM) increased by Rs 2,057 crore over the interim budget estimate of Rs 12,070 crore. C
No mention or allocation of funds for the National Urban Health Mission.D
Under the Rashtriya Swasthya Bima Yojana (RSBY) that was started last year, all BPL families would get health cover. Allocation under RSBY increased by 40 per cent to Rs 350 crore in FY09-10. 4.6 million BPL families in 18 states and UTs have been issued biometric smart cards. The demand for extending infrastructure status to healthcare services sector is not met. D
There were also demands to extend tax holidays for investment in hospitals in tier II and III cities from the current five years to 10 years — this also has not been discussed in the budget proposals. D
Enhanced deduction given under Section 80 DD for severe disabilities — changed from Rs 75,000 to Rs 1,00,000. C
Although extension of tax holiday for units in software technology parks (STPs) and export-oriented undertakings (EOUs) by a year is a welcome step, it falls short of industry expectations.
Removal of anomaly in the formula for computing direct tax deduction under Section 10AA; C
No deduction to be allowed under Section 10A/10AA/10B with retrospective effect from FY 2002-03, if no deduction has been claimed in the tax return. D
Excise duty/countervailing duty exemption on the portion of value representing the consideration for the transfer of the right-to-use packaged or canned software. C
In these turbulent times, the extension of tax holiday appears to be the silver lining.
The enhancement in the minimum alternate tax (MAT) rate spells bad news for STPs and EOUs, resulting in additional tax outgo by around 50 per cent; the saving grace being that the MAT credit can be carried forward for another three years.
Removing the anomaly in the formula prescribed under Section 10AA prospectively could result in litigation for the past years.
METALS AND MINING
Funds for the Geological Survey of India may help enhance national inventories of minerals.
Simplified tax code proposed to be established soon. C
Continuation of service tax on contract mining. D
Accelerated development of railways and roads. C
Steel — Higher budgetary allocation for infrastructure is likely to push demand for steel. The sector's demand for import curbs has not been met.
Iron ore — No export duty imposed, this is good news for the miners.
Coal — The budget may not have added to an already long list of reform proposals muted by the ministry, from coal regulator to competitive bidding for allocation.
OIL AND GAS
Extension of sunset clause for refineries up to 31 March 2012 is welcome.
Undertaking to mean all blocks licensed under a single contract for the purpose of computing tax holiday. D l100 per cent tax holiday for companies producing natural gas under NELP VIII. C
Excise duty on naphtha reduced from 16 per cent to 14 per cent. C
Mineral oil producing companies — They would not be able to avail the full tax holiday benefit. By proposing a retrospective amendment, the government has tried to negate a ruling favourable to the taxpayer.
Tax holiday on natural gas — Welcome clarification for NELP VIII. However, for production from non-NELP VIII should also have been clarified to be entitled to tax holiday to avoid litigation on the issue.
Pipeline companies — The move towards investment-linked benefit from profit-based benefit would result in higher tax burden over a period of 10 years.
Research and development — Activities that are in the nature of R&D in this sector may enjoy the weighted deduction of 150 per cent of the expenses.
The budget was eagerly anticipated by the pharmaceutical industry as being the first concrete expression of the government's ambitious agenda for economic reform.
Introduction of safe harbour rules under transfer pricing regulations. C l5 per cent range benefit available under transfer pricing regulations restricted.D
Basic customs duty (BCD) on nine specified drugs, influenza vaccine and bulk drugs will be reduced from 10 per cent to 5 per cent. BCD will also be reduced from 7.5 per cent to 5 per cent on specified life-saving devices used in treatment of heart conditions. C
The introduction of safe harbour rules should help in setting appropriate mark-ups for services outsourced to India in the pharma industry. However, the 5 per cent benefit range would not be available to the taxpayer in case the revised arms-length price does not meet the arms-length-price. This would result in higher transfer pricing adjustments.
Though tax holiday benefits for EOUs are extended by one more year, the increase in MAT rate may result in higher tax costs for pharma companies located in tax-free zones.
The budget proposes action on long-pending demands to remove implementation bottlenecks and to ease financing.
Tax holiday for setting up undertaking for generation, transmission or distribution of power, and renovation and modernisation of network has been extended. C
Allocation for the Accelerated Power Development and Reform Programme increased by 160 per cent to Rs 2,080 crore. Further, allocation to the Rajiv Gandhi Grameen Vidyutikaran Yojana increased by 27 per cent to Rs 7,000 crore. C
Plan to implement an Integrated Energy Act to improve energy security. C
New investment — There is positive intent to improve financing and address implementation bottlenecks, but ground actions have to be taken to realise the benefits intended.
Programmes — The higher allocation on targeted programmes will help improve rural access and distribution efficiency, but the overall outlay still remains small relative to the need, and the programme design needs to improve.
Cost of energy — There are no provisions that reduce tax burden except for a very limited impact of lower duty on naphtha. A major disappointment is the limited extension of sunset clause for tax holiday.
Big-ticket regulatory reforms, including FDI liberalisation and grant of industry status, remain work in progress. The sector, though, stands to gain with increased disposable income in the hands of individuals.
100 per cent tax deduction in respect of capital expenditure incurred for setting up and operating cold-chain facilities or a warehouse facility for the storage of agriculture produce. C
Presumptive taxation has been increased from 5 per cent to 8 per cent of gross turnover/ gross receipts. D
The finance minister reiterated the commitment to introduce the goods and service tax (GST) from 1 April 2010. The Centre and states have agreed to a dual GST structure comprising Central and state GSTs to be legislated, levied and administered by the Centre and states respectively C
Food retailing — With the tax incentive provided for setting up and operation of cold chain and warehouse facilities, supply chain will become efficient by reducing wastage and damage of perishable products.
Funding issues for retailers — Abolition of fringe benefit tax will improve the cash situation of retailers who are currently bleeding on account of economic slowdown.
Retail sector — The budget should have a positive impact on the sector as a whole due to increased disposable income in the hands of the consumers (through tax cuts announced), which has a direct nexus to increased spending.
The move to refinance 60 per cent of commercial bank loans for PPPs through IIFCL should speed up highway and other road development in the country.
Provisions And Impact:
Limited liability partnership (LLP) — MAT, DDT and surcharge are not applicable to LLP, thereby reducing the overall tax cost in India. C
Enhanced MAT liability would be an additional cost to the road construction companies bidding for new projects, since MAT credit may not be fully utilised due to deduction under Section 80-IA.D
Allocation to NHDP is proposed to be stepped up by 23 per cent over the 2008-09 budget expenditure. This will give necessary impetus to the road sector. The Road Transport and Highway Ministry's target of constructing 20 km of road per day have put road projects on a fast lane. C
Goods and service tax on course to come into effect from 1 April 2010. C