UNION BUDGET 2013-14 & ITS IMPACT

Who Gained & Who Lost

On the last day of February, Mr. P. Chidambaram, the finance minister of India presented the eighth annual budget in the parliament. The budget is basically highlighted as “Risky but admirably bold” in the industry after considering upcoming election year. By this budget, FM wants to accelerate GDP growth and to tame inflation through fiscal consolidation. Shri Chidambaram made promises to the women, the youth and the poor - the three faces that represent the majority of the people of India. According to him, India is expected to become a US$ 5 trillion economy by 2025. The theme of his budget reads as “Higher growth leading to inclusive & sustainable development” and comprises of following decisions:

·         For Consumers:

Ø    Excise duty on mobile phones worth more than Rs. 2000 has been increased from 5% to 6%. For instance, an ‘Apple iPhone 5’ will now cost around Rs. 1300 more.

Ø   Import duty on luxury cars has been also increased from 75% to full 100%. So, on-road prices of top-end models from companies like Aston Martin will increase by Rs. 45 lakh – 1 crore.

Ø   As announced in the budget, now a male passenger can bring jewellary worth Rs. 50,000 while a woman can bring upto Rs. 1 lakh without paying any custom duty. Earlier it was Rs. 25,000 for both the genders.

Ø   The bill of AC restaurant will be more costly now. All these restaurants are brought into service tax net. Due to this, it is expected to pay Rs. 120 more on a bill of Rs. 1000.

Ø      Excise duty on regular-sized cigarettes and cigars is hiked by 18%. So, a pack of 20 classic cigarettes, currently sold at Rs. 116, will now cost around Rs. 130.

Ø      Excise duty on SUVs (Sports Utility Vehicles) is also increased to 30% from 27%. This may result to pay Rs. 60000 more on these vehicles.

Ø    Silver will now cost more as FM has decided to impose a 4 per cent excise duty on silver produced from smelting of zinc and lead.

·         For Investors:

Ø    It is proposed to introduce instruments that will protect savings from inflation especially the savings of the poor and middle classes; these could be inflation-indexed bonds or inflation-indexed national security certificates.

Ø   Now, those with income upto Rs. 12 lakh can invest into RGESS (Rajiv Gandhi Equity Saving Scheme). Earlier the limit was Rs. 10 lakh. Tax deduction of 50% of the investment, subject to a maximum of Rs 25,000, is extended to 3 years from earlier 1 year.

Ø   FM has allowed financial institutions to issue tax-free bonds in 2013-14 upto Rs. 50,000 crore instead of Rs. 25,000 crore as announced in the last year budget. Now, more tax free bonds will be available before the investors.

Ø     Banking customers will feel easier in buying insurance if their KYC process is already done. The process has been made easier and simpler than earlier.

Ø   Securities Transaction Tax (STT) on mutual fund (MF) and exchange traded fund (ETF) redemptions at fund counters is slashed to 0.001% from 0.25% and STT on MF/ETF purchase and sale on exchanges is reduced from 0.1% to 0.001%, only to the seller.

Ø    For derivative traders at equity market, STT on Futures comes down to 0.01% from 0.017% and at derivative market; traders need to pay a new tax called Commodities Transaction Tax (CTT) at the same rate applicable to equity futures.

·         For Taxpayers:

Ø  There has been no change in income tax slabs from the last year budget.

Ø  Basic customs duty, normal excise and service tax rates are remain unchanged at 12 per cent.

Ø  Those who earn upto Rs. 5 lac per annum will get a tax rebate of Rs. 2060. In total, around 18 million taxpayers will be benefitted from this.

Ø  And those whose annual income is more than Rs. 1 crore will pay 10% surcharge. Earlier it was 5 %. Now these super rich people will have to pay atleast Rs. 3 lac in tax.

Ø  First-time home buyers taking loan upto Rs. 25 lac will get tax rebate on interest payment of additional Rs 1 lakh (total 2.5 lakh).

Ø  Those who want to buy property worth of more than Rs. 50 lac will need to pay 1% TDS (Tax Deducted at Source).

Ø  Like super rich individuals, domestic corporate having a profit of more than Rs. 10 crore will pay 10% surcharge instead of 5% whereas foreign companies will now pay 5% surcharge in place of earlier 2%.

·        Various Estimates of the Budget:

Ø  The size of whole budget is Rs. 16.65 trillion where plan and non-plan expenditure is Rs. 5.55 trillion and Rs. 11.09 trillion respectively. The plan expenditure has been increased by 29.4% as compared to the fiscal year 2012-13.

Ø  Gross market borrowing is seen at Rs 6.29 trillion whereas Net market borrowing is estimated at Rs 4.84 trillion in 2013-14.

Ø  Fiscal Deficit has been targeted at 4.8% of GDP in the fiscal year from 5.2% of 2012-13.

Ø  Total disinvestment target is Rs. 55,814 crore. In 2012-13, it is Rs. 24,000 crore.

Ø  The direct tax collection has been estimated at Rs. 13,300 crore whereas indirect tax is estimated at Rs. 4,700 crore.

Ø  New taxes are expected to collect Rs. 18000 crore for the government.

Ø  Total subsidies is Rs. 2, 31,084 crore which is 11% lower than current fiscal (2012-13). 

·        Allocation of Expenditure:

Ø  For defence = Rs. 2,03,672 crore

Ø For education = Rs. 65,867 crore

Ø For health and family welfare scheme = Rs. 37,330 crore

Ø For Backward Region Grant Fund = Rs. 11,500 crore

Ø For drinking water and sanitation = Rs. 15,260 crore

Ø For Jawaharlal Nehru urban renewal scheme = Rs. 14,873 crore

Ø For Rural Housing Fund = Rs. 6000 crore

Ø For Urban Housing Fund = Rs. 2000 crore

Ø For Nirbhaya fund (to empower women and provide safety in the wake of Delhi gang-rape incident) = Rs. 1000 crore

Ø For youth(to boost employability and productivity) = Rs. 1000 crore

Ø To Rural Development Ministry = Rs. 80,194 crore (raised by 46% from the last budget)

Ø To Ministry of agriculture = Rs. 27,049 crore (raised by 22% from the last budget)

Ø To Integrated Child Development Services (ICDS) = Rs. 17,700 crore

Ø To Public Sector Banks = Rs. 14000 crore (capital infusion by RBI in order to meet the Basel III norms)

Ø For CST compensation to states =Rs. 9000 crore (as a 1^st installment)

Ø For Mid-day Meal = Rs. 13,215 crore

·        Other Announcements:

Ø India’s first women public-sector bank will be set up by the month of October with a minimum capital of Rs. 1000 crore. It's to be run by women, hire mostly women and caters primarily to women and the self-help groups and businesses they run.

Ø Insurance companies can open offices in tier II cities without prior permission from Insurance Regulatory and Development Authority. So, it will be easier to find an insurer for the people living in such cities.

Ø  The Finance Minister announced the grant of investment allowance at the rate of 15 percent to manufacturing companies that invest more than Rs. 100 crore in plant and machinery during the period 1.4.2013 to 31.3.2015. This will be in addition to the current rates of depreciation

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Ø  Vocational courses and testing activities in relation to agriculture are announced to be exempted of service tax.

Ø  Handmade carpets & textile floor coverings of choir or jute are exempted from excise duty.

·         Impact on Various Industries:

Ø  Auto: A 3 % high in excise duty for SUVs a big jolt for the industry. But allocation of rupees 14874 crore for JNNURM will support purchase of 10000 buses, which a positive. Increase in custom duty on selected imported vehicles may subdue demand in the short term.

Ø  Infrastructure: In order to provide a boost to the infrastructure sector, infrastructure finance companies have been allowed to issue tax free bonds to the tune of Rs. 50000 crores in the next financial year. This is good for investors in the highest tax slab as it would provide assured and better long term returns than fixed deposits. But considering the fact the interest rates are likely to fall going ahead, it has to be seen what rates the issuers will offer.

Ø  Banking/ Finance: Capital infusion will help PSU banks to meet Basel III norms and support loan growth. Housing finance focusing ticket-size loans will benefit. Additional income tax benefit for first home buyers, enhancement of Rural Housing Fund and setting up of Urban Housing Fund will encourage buyers and add to banks’ priority sector credit.

Ø  Cement: Additional interest deduction of upto Rs. 100000 on housing loans will facilitate greater investment in the sectors and boost cement demand. Construction of nearly 3000 km in road projects and allocation of Rs. 8000 crore for urban and rural development funds will also boost demand for cements.

Ø  Construction/Infra: A regulator for road projects will ensure timely approvals and fund allocation. A project for 3000 km to be awarded in first half of FY14 is welcome. Credit enhancement by IIFCL and encouraging IDFs will provide company’s low-cost funds. Initiatives like issuance of tax-free infrastructure bonds, proposals of regulatory authority on roads and allocation for urban renewal mission are expected to drive investment as well as provide additional funds to various infrastructure sectors. A regulatory authority could help in ensuring faster implementation of projects.

Ø  FMCG: Higher tax on royalties will increase tax outgo of multi-national FMCG companies, impacting their bottom line. Rise in excise duty on cigarettes, if passed on to consumers, may lead to some demand moderation for cigarette companies. Increase in allocation for rural development and farm-centric scheme is expected to boost production and rural prosperity and increase disposal incomes.

Ø  Drugs/Pharmaceuticals: Though no direct impact, allocations to the ministry of health and family welfare and provisions for medical education, training and research will indirectly benefit the sector. Increase in surcharge on corporate tax and increase in dividend distribution tax will have adverse impact on large pharmaceutical companies with high tax and dividend payout rates.

Ø  Hospitality: Service tax on AC restaurants will lead to lower revenue growth. As companies will pass on the burden to consumers, it will gradually reduce the frequency of their visits. 

Ø  Capital goods: The investment allowance could have mildly positive effect, given the time–bound nature of the incentive. The re-introduction of the generation based incentive will help improve viability of wind power projects; coupled with low-cost financing, this will attract greater investment.

Ø  Media/Entertainment: The increase in custom duties on set-top boxes would increase the subscriber acquisition costs of direct-to-home operators and multi-system operators in the short term, as most STBs are still imported.

Ø  Oil and Gas: The shift from a profit-sharing to a revenue-sharing policy for exploration and production of oil and gas would reduce cost of monitoring by the government. The review of natural gas policy could improve clarity on determination of domestic gas prices and any increase in gas prices would benefit producers.

Ø  Retail: Exemption of excise duty is a positive for the readymade garment industry. The increase in the duty on mobile phones may impact demand for handsets, which remains a significant segments for the retail industry.

Ø  Telecom: Hike in excise duty on mobile phones will not significantly impact local manufacturers since most make basic phones are priced below the level of Rs. 2000. Going by the muted response to spectrum auction in 2012-13, the government may find it difficult to achieve the budgeted receipt target in 2013-14.

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Ø  Textiles: Removal of excise duty o garments augurs well for garment-manufacturing companies. Now, companies will be able to shave off 3.6% of their costs, which will improve operating profit by about 2%.

Ø  Real Estate: Higher fund allocation (rural fund of Rs. 6000 crore and urban fund of Rs. 2000 crore) will trigger greater home ownership. Higher interest deduction of Rs. 2.5 lakh on home loans upto Rs. 25 lakh is a positive sign for the industry.

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(All the the above facts and figures are extracted and compiled by Krishna Prasad Sharma (IILM-CMS) from various reliable sources like financial newspapers and government official websites. The views are not personal.)