Assignment

On
Budget 2010-11

Submitted To Submitted By
Col. Arun dhongde Anjali Jhalani
PGDBM-II
Roll no 5 B
Batch 2008-10
INTRODUCTION: -
The Honorable Finance Minister has presented the Union Budget
amidst apprehensions that he might increase taxes to counter the
rise in the fiscal deficit. The rise in the fiscal deficit was of course,
brought about largely because of the need to give a large fiscal
stimuli to revive the economy which had slowed down amidst the
global financial crisis.

The Economic Survey 2009-10 identified the following challenges:

1. Fiscal consolidation to put the country on the path of fiscal

rectitude

2. Quick revert to the high Gross Domestic Product (GDP) growth

rate of 9 percent and then find a path to cross the ‘double digit
growth barrier’

3. Making growth more inclusive and alleviate poverty

4. Managing inflation, especially that of food prices

The Growth Rate of the Indian economy marginally improved in

2009-10 to 7.2 percent from 6.7 percent in 2008-09 but was still
lower than its average growth rate of 8.8 percent over the last five
years (2003-04 to 2007-08). The Government however was
successful in warding off a sustained economic slowdown by
increasing disposable income in the hands of the people, for
instance by effecting reductions in indirect taxes and by increasing
expenditure on programmers like National Rural Employment
Guarantee Act (NREGA) and on rural infrastructure. The
implementation of the Sixth Pay Commission recommendations and
the debt relief to farmers also contributed to this end.

The net result of the above measures was an increase in fiscal

deficit from 2.6 percent of the GDP in 2007-08 to 6.8 percent of
GDP. The Gross Fiscal Deficit (including the States’ share) therefore
touched 10 percent of GDP.

In shaping the fiscal policy for 2010-11 and beyond, the

recommendations of the Thirteenth Finance Commission (FC-XIII)
have been taken on board. The FC-XIII has recommended a
calibrated exit from the expansionary fiscal stance of 2008-09 and
2009-10, as the main agenda of the Central Government. Further it
has suggested that the revenue deficit of the Centre needs to be
progressively reduced and eliminated, followed by an emergence of
the revenue surplus by 2014-15.
What is reassuring is the directional stance in re-iterating the
Government’s commitment to bringing in a uniform Goods and
Services Tax regime and the New Direct Taxes Code by 1 April,
2011.
At first glance, the Direct Taxes Proposals are relatively benign,
save the increase in Minimum Alternate Tax to 18 percent from 15
percent, and seek to:

• Lower tax burden on individual taxpayers by widening the tax

slabs

• Allow small companies to convert to limited liability partnerships

without attracting capital gains tax liability

• Increase turnover limits for applicability of compulsory tax audit

• Promote investment in research and development to enhance

competitiveness

• Encourage savings to be channeled into infrastructure by

providing a tax deduction on investment in long-term infrastructure
bonds

• Simplify and rationalize provisions relating to tax deduction at

source

On the Indirect taxes front, as expected, the fiscal stimulus was

partly withdrawn by across the board increase in excise duty rate
from 8 to 10 percent. The increase of excise duty on petrol and
diesel was somewhat surprising, given the concern around inflation.

Service tax and customs duty rates were left at the same levels.
However, the ambit of service tax is proposed to be increased
significantly by covering aviation, real estate, and rail transport and
specified health services. This appears to be a step towards the
implementation of GST, which revolves around a concept of
moderate tax rate with a larger tax base. Export of services rules
have been simplified and certain procedural relaxations have been
provided to service exporters.

Overall, if the immediate positive reaction from the stock markets is

any indication, the corporate sector and investing community seems
elated at having been spared an increase in headline direct tax
rates; however, one will need carefully assess the impact of the
provisions by analyzing the fine print in the Finance Bill. The Budget
seems to be well intended towards returning to the path to fiscal
rectitude.

Individual taxpayers may find that the money that they have saved
due to the widened tax slabs may just about meet increased
expenditures due to higher indirect taxes being levied on almost all
goods and services, Corporate in general do not seem to have much
to cheer about especially as the increase in the Minimum Alternate
Tax is likely to result in an immediate cash outflow.
The summary that follows highlights the salient features of the
Finance Bill 2010, in terms of direct and indirect taxes.

Unless otherwise indicated, the proposed amendments relating to

direct taxes are to apply from the assessment year 2011-12 and
unless otherwise indicated, the changes relating to Central Excise
and Customs Duties come into effect immediately. Changes in
Service tax are to come into effect from a date to be notified, after
the enactment of the Finance Bill, 2010.

IMPACT ON CONSUMER: -
The finance minister has announced a 2% increase in excise duty
and consumer durables companies making ACs, refrigerators and
other appliances are likely to pass on this cost to the consumer.
In fact, the cost of most white goods is likely to go up owing to
impending hi k e in fuel prices and rising raw material costs.

The good news is that microwave ovens and mobile phone

accessories may be cheaper if the firms pass on the excise duty
benefits to the consumer. “Special additional duty on mobile phones
has been rolled back. This will benefit the mobile companies which
import packaged mobile phones,” said Moon B. Shin, managing
director, LG Electronics India Pvt Ltd. “Abolishing the 2% excise duty
on mobile phone accessories is also encouraging for consumers.”
Expect prices of refrigerators and ACs to go up in the coming week
as most appliances and electronics makers including Godrej
Appliances, Samsung Electronics India Pvt Ltd and LG Electronics
India say that it will be difficult for them to absorb the additional
cost in a challenging environment.

Although duties have been reduced on LED lights and water purifiers
as well, according to experts in the related industries, consumers
will not enjoy any significant benefit from the change. Lower central
excise duty on replaceable kits for household water filters, other
than those based on reverse osmosis technology, to 4% will not
bring down the price of final product.

IMPACT ON INVESTOR: -
Infrastructure bonds are back, with the Budget giving you one more
opportunity to save on income tax. You will now be able to invest in
these bonds and claim a deduction of up to Rs20, 000, besides the
existing tax breaks under section 80C. The new deduction comes
under section 80CCF.

Budget proposals have now revived the tax-deductible infrastructure

bonds by creating a fresh limit of Rs20, 000 just for them and
putting them separately under a new section. There are two issues
to consider be for e buying these bonds. The fine print says the
bonds will be notified by the Central government. Expect this to
come in a month or two, industry experts said. Till then, it is unclear
whether private companies would be allowed to issue such bonds or
the option to raise money by issuing bonds will only be given to
government companies.

IMPACT ON MARKET: -
A lower fiscal deficit, an excise tax hike which had already been
accounted for and a personal income tax bonanza led to a relief rally
as Indian equities soared 2.5% when the finance minister presented
the Union budget. It was short-lived however as investors pared
some of the gains fearing inflationary consequences and questioned
the assumptions on government spending increases in the next
financial year. At the close of trading on Friday, India’s benchmark
index, the Sensex, was 1.08% up from the previous close at
16,429.55, down from an intraday high of 16,669.25, marking
finance minister Pranab Mukherjee’s announcement that next year’s
fiscal deficit would be capped at 5.5% and at 4.1% in the next two
years. The 50-stock Nifty index closed 1.29% up at 4,922.3. The
debt markets were encouraged by the lower borrowing target of
Rs3.45 trillion for the year, down from the current year’s record
Rs4.5 trillion. The expenditure hike of 8% is one of the lowest in
recent years thanks to the modest allocations for subsidies and
defense. For instance, the overall subsidy bill projected for next year
is 11% lower, while the sum allocated for the Mahatma Gandhi
National Rural Employment Guarantee Scheme is only Rs1,000 crore
higher than the present fiscal. The government expects asset sales
and high-speed mobile spectrum auctions to be substantial sources
of revenue next year. “There is a fair bit of reliance on the 3G
auction and disinvestment figures and if there’s any slippage on that
front, it will be negative.”

While the budget is seen as At the sectoral level, auto stocks soared
the most with the BSE Auto Index up 4.74% as the 2% excise tax
hike was on expected lines. Banking scrip’s also gained a collective
2.58% after the budget announced that the RBI was considering
additional licenses for the private sector. The top gainer among the
50 Nifty stocks was Reliance Capital Ltd -- a banking license
candidate up 7.83% at Rs784.7. It was followed by Tata Motors Ltd,
which gained 7.21% to close at Rs715.55.positive, investors said
they would look at global factors such as high debt in the Euro zone
and banking regulations across the world in the medium term,
besides valuations.

Some part of the post budget rally can also be attributed to the fear
psychosis of investors. Investors to a large extent were unduly
concerned about budgetary proposals and their likely impact on the
stock markets. Since the Indian economy is in a high growth
trajectory, the economic environment has to be supportive in order
to achieve the desired results. However, uncertainties attached to
the limited options available with the government led to
nervousness among investors.

IMPACT ON INDUSTRY (SECTOR WISE): -

AUTO COMPONENT: -

Proposal: - Excise duty on auto components and tyres increased

from 8% to 10%. Interest subvention of 2% on pre-shipment credit
for small and medium exporters extended to 31 March 2011.

Impact: - No significant impact on the industry. Increase in excise

duty on tyres will be passed on fully to original equipment
manufacturers (OEMs) and replacement segments. A rise in excise
duty for the auto component sector may be passed on to automobile
manufacturers. However, if absorbed, it will be offset by increase in
demand. The interest subvention of 2% will have a marginally
positive impact for small and medium exporters engaged in exports
of auto components.

BANKING/ NBFC: -

Proposal: - RBI to consider giving banking licenses to private sector

companies non-banking finance companies. Government to
recapitalize select public sector banks by Rs16,500 crore; additional
capital to region rural banks. Increase in interest subvention from
1% to 2% for farmers who pay as per repayment schedule,
extension of debt waiver and debt waiver for farmers extended to
30 June.

Impact: - Competition is likely to further intensify. Recapitalizing

public sector banks is likely to help around one third of these banks.
The additional interest rate subvention schemes to encourage
prompt repayment by farmers should improve credit culture. But b,
the government’s borrowing programmed for FY11 remains sizeable
and if the credit off take is more than 15% - 16%, bond yields may
rise and thereby impact treasury profits.

CAPITAL GOODS/ENGINEERING: -

Proposal: - Increased allocation for power and infrastructure

sector; excise duty cut from 8% to 4% on compact fluorescent
lamps (CFL) and LED lamps; 5% concessional import duty on inputs
for photovoltaic, solar panels; excise duty waived on photovoltaic,
solar panels, and on inputs required in rotor blades.

Impact: - Increased allocation and long-term funding availability for

power and infrastructure projects will induce more investment and
thereby benefit equipment manufacturers. Focus on energy
efficiency and excise duty reduction for CFL will result in improved
demand prospects for players in the lighting segment. Concessional
import duty and waiver of excise duty on photovoltaic and solar
panels as well as lower excise duty on inputs for rotor blades will
benefit photovoltaic cell and wind turbine generator manufacturers,
respectively.

CEMENT: -

Proposal: - 2% excise duty hike.

Impact: - Increase in outlay on roads, subventions on housing and

focus on infrastructure development should boost demand for
cement. Increased rural income under National Rural Employment
Guarantee Scheme will also boost rural housing demand and, in
turn, demand for cement. However, increase in excise duty and
imposition of Rs50 per ton cess on imported and domestic coal will
increase costs, which will difficult to pass on to consumers given the
current oversupply situation.

FMCG: -
Proposal: - Increase in allocation for rural development,
agricultural centric and employment generation schemes; reduction
in personal income tax; increase in central excise duty from 8% to
10%; increase in duties on all tobacco products.

Impact: - Increased allocation for rural development and

employment generation is a positive for the sector, since it is
expected to increase consumer spending. Reduction in personal
income tax will benefit the sector by increasing disposable incomes.
The increase in central excise duty, if passed on to consumers, may
lead to some demand contraction; increase in duties for tobacco
products will adversely affect the segment.

Implementation will be Key to Success: -

Government is planning for a fiscal correction led by a spending

discipline rather than a cut in capital expenditure or soaring taxes.
at makes this fiscal correction plan quite different from many of its
predecessors and seems a bit unrealistic, given the political
economy constraints in India. We should also take note of the huge
32% rise expected from non-tax revenues, including disinvestment
and auction of third-generation, or 3G, telecom spectrum. The
money collected from disinvestment would be used for capital
spending of social sector schemes so as to create assets. Thee
decisions to give out new bank licenses and to expand the bank
branch network are some of the moves to deepen the financial
sector and also promote financial inclusion. The promise that oil
marketing companies would be paid cash rather than bonds to cover
under recoveries is also a step in the right direction— both for the
cash flows of the oil companies and as a step towards greater
budgetary transparency. There are undoubtedly and inevitably
many budgetary moves that are either puzzling or which hurt select
groups.

However, the overall tenor and promise of the Budget is worthy of

praise, given economic and political realities in the country. The
plan has been revealed. Now comes the next step: implementation.
It may not be as simple as it seems.