Budget 2011-12 Post Budget Analysis - Devil lies in the Expenditure

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Budget 2011-12Post Budget Analysis - Devil lies in the Expenditure

Emkay Research Team

28 February, 2011

Emkay Global Financial Services Ltd.

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Budget 2011-12 Highlights

Devil lies in the Expenditure

§ Key concern: Fiscal deficit target of 4.6% seems a challenge. Non-plan expenditure under the heads: subsidies,

social services, economic services and other non-plan capex significantly lower over FY11 RE – little optimistic

§ Direct tax: Tinkering of MAT rate from 18% to 18.5%; reduction of corporate surcharge from 7.5% to 5% and increasing the threshold limit for individual income tax from Rs160000 to Rs180000

§ No major changes in existing indirect tax structure. New goods and services brought under excise and service

tax net – hinting a move towards GST

§ No big bang announcement (like increase in FDI for multi brand retail, etc).

§ Positive moves: To improve foreign inflows in infrastructure sec tor by a) increasing the limit of infrastructure

bonds from US$5bn to US$25bn and b) allowing FIIs to invest in bonds of unlisted infra SPVs

§ Domestic mutual funds to accept equity subscription from foreign investors who meet KYC requirements

§ Five point strategy for curbing black money. Amnesty on card ?

§ Fertilizer sector given an infrastructure status - more investment to flow in.

§ The budget will have minimal impact on the market.

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Winners & Losers

Cummins India, Greaves Cotton, Punj Lloyd, Elecon Eng, McNally Bharat, TRF

L&T, BHEL, Thermax, Voltas, Blue StarEngineering & Capital Goods

GSFCChambal Fertilisers, Tata ChemicalsAgri-input & Chemicals

Ashok Leyland, Bajaj Auto, Hero Honda, M&M, Maruti, Tata Motors and TVS Motor

Automobile

Andhra bank, IOB, Union bank, UCO bank, PNB, BOB, Bank of Maharashtra, BOI, LIC Housing Finance, HDFC, ICICI Bank, SBI

Banking and Financial Services

Shree Cement, GrasimCement

Telecom

Power

Pharma

Paper

Oil & Gas

Metals

Media

IT

Infrastructure

FMCG

Sector

Godrej Consumer, Marico, TitanITC, Godfrey Philips, HUL

GMR Infrastructures, GVK Power & InfraIRB Infra, IL&FS Transportation, Ramky Infra, Era Infra

All Companies

All Companies

Sesa Goa, Sterlite IndustriesAll the steel companies, Hindustan Zinc MOIL, Hindustan copper, JSL Stainless

All Companies

BILTTNPL, JK Paper

Almost all domestic pharma companies operating in SEZ

Biocon/ Dishman

Adani PowerNTPC, Lanco Infra, Reliance Power, JSW Energy, Jaiprakash Power, Nava Bharat Ventures, KSK, GIPCL

Bharti, Idea, Rcom

NegativeNeutralPositive

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Tackling medium term concerns

Supply side constraints on agriculture

§ Target of 26% growth agriculture credit for banks to Rs4750bn

§ Giving cold storage and fertilisers, infrastructure status

§ Allocations of Rs3bn for improving productivity of crops which are largely imported like palm oil or volatile in prices like vegetables

§ Allocation of Rs3bn for improving productivity of fodder to control rising milk prices

Improve the Fx flows to tackle current account deficit

§ Limit on FII investments in infra bonds raised to USD25bn (from USD5bn), total corp bond limit at USD40bn now (from USD20bn)

§ FII can also invest in the bonds of unlisted infrastructure SPVs

§ Foreign investors other than those registered with SEBI or NRIs allowed to subscribe to Indian mutual funds’schemes subject to KYC. However, transaction costs will hold key here

§ Withholding tax reduced from 20% to 5% on infrastructure lending through notified funds by FII

Improve flow of funds to infrastructure

§ Allocation of Rs2.14tn to infrastructure under the central plan, up 23% over last year

§ Raising FII investment limits and lower withholding tax for investment through specified route

§ FII can also invest in the bonds of unlisted infrastructure SPVs with lock in period of three years. FII can trade amongst themselves even in lock in period

§ Increase in IIFCL refinancing limits to Rs250bn, Rs200bn in FY11

§ Rs300bn of tax free bonds by Railways, NHAI and HUDCO

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Tax revenues growth driven by corporate tax; input cost pressures may

dent the target

No change in the divestment target from FY11BE

Fert and petro subsidies reduced by ~20%, unlikely case unless some

reforms down the line

Non-plan exp excl subsidies budgeted to decline by 3.4%!!

Plan expenditure under control as per Planning Commission’s directive; no

mention of SBI rights issue

Absolute number in line with exp. The base for % changed to market price

(from factor cost)

Mkt borrowing at Rs3.4tn as expected

While letting short term factors slip away

Receipts FY10A FY11RE FY12BE % yoy chgRevenue receipt 5,728 7,838 7,899 0.8

Tax (net) 4,565 5,637 6,645 17.9Non tax 1,163 2,201 1,254 -43.0

Capital receipt 332 317 550 73.3Revcovery of loans 86 90 150 66.9Others 246 227 400 75.9

Total receipt 6,060 8,156 8,449 3.6

ExpenditureNon-plan expenditure 7,211 8,216 8,162 -0.7Non-plan expenditure (Excl Int) 5,080 5,808 5,482 -5.6

NP-Revenue 6,579 7,267 7,336 0.9Interest 2,131 2,408 2,680 11.3

NP-Capital 632 948 826 -12.8Plan expenditure 3,034 3,950 4,415 11.8

P-Revenue 2,539 3,269 3,636 11.2P-Capital 495 681 779 14.5

Total expenditure 10,245 12,166 12,577 3.4T-Revenue 9,118 10,537 10,972 4.1T-Capital 1,127 1,629 1,606 -1.4

Fiscal surplus/(deficit) -4,185 -4,010 -4,128 2.9% of GDP -6.4 -5.1 -4.6

Revenue surplus/(deficit) -3,390 -2,698 -3,073 13.9% of GDP -5.2 -3.4 -3.4

Primary surplus/(deficit) -2,054 -1,602 -1,448 -9.6% of GDP -3.1 -2.0 -1.6

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Rural development outlay flat despite linking NREGS wages to CPI by

corporate tax; input cost pressures may dent the target

Outlay on edu though higher than last year, not much higher than BE

Urea and other fert sub lower despite naphtha and fuel oil prices up sharply

Petroleum subsidies lower by more than a third despite under-recoveries up

sharply

Only health and irrigation outlay show sharp growth

Rs bn FY10A FY11RE % yoy chg FY12BE % yoy chgRural Development 386 461 19.5 463 0.4

Irrigation & Flood Control 95 112 18.1 135 20.1Energy 98 107 9.0 118 10.4

Transport 483 635 31.4 641 1.0Communications 61 41 -32.9 39 -5.7

Water supply, Housing, Sanitation 247 261 5.8 266 1.8Education, Sports, Youth Affairs 425 515 21.2 583 13.1

Health and Family Welfare 205 222 8.4 271 21.9Total 2,001 2,356 17.7 2,516 6.8

Major Subsidies (Rs bn) FY11RE FY12BE % yoy chgFood 606 606 0.0Indigenous(Urea) Fertiliser 151 133 -11.8Imported (Urea) Fertiliser 64 70 9.2Decontrolled fertiliser 335 297 -11.3Total Fertilizer Subsidy 550 500 -9.1Petroleum Subsidy 384 236 -38.4Total 934 736 -21.1

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Some carried forward balances from FY11 and higher borrowings against small savings keeps the borrowing

stable next year

Indirect tax revenues growth in line with nominal GDP growth rate

Central excise duty and service tax kept unchanged at 10%

We were expecting 2% increase in at least service tax

Funding of expenditure for FY12BE

Tax revenues FY10A FY11RE FY12BE % yoy chgDirect taxes

Corporation tax 2,447 2,964 3,600 21.5Income tax 1,323 1,491 1,720 15.4

Total direct taxes 3,770 4,454 5,320 19.4

Indirect taxesCustoms 833 1,318 1,517 15.1Excise 1,036 1,378 1,641 19.1Service tax 584 694 820 18.2Other taxes 21 25 26 5.7

Total indirect taxes 2,475 3,414 4,004 17.3

Total tax collections (gross) 6,245 7,869 9,324 18.5Transfer to states 1,680 2,232 2,680 20.1

Total tax collections (net) 4,565 5,637 6,645 17.9

Govt borrowings FY11RE FY12BEMarket loans 3,354 3,430Short term borrow ings 100 150External assistance 223 145Small Savings 178 242State provident fund 100 100Others 205 -139Total 4,160 3,928

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ONGC IPO probably not going through this year

Even plan expenditure to see robust growth

Revised estimates for FY11 suggest accelerated expenditure in Q4

Would include subsidy disbursements

Tax revenues revised upwards by Rs400bn as expected

Expenditure to accelerate in Q4FY11

Receipts FY11BE FY11RE % chg Q4FY11I % of Full yearRevenue receipt 6,822 7,838 14.9 1,996 25.5

Tax (net) 5,341 5,637 5.5 1,725 30.6Non tax 1,481 2,201 48.6 270 12.3

Capital receipt 451 317 -29.7 4 1.3Revcovery of loans 51 90 75.5 4 4.6Others 400 227 -43.1 0 0.0

Total receipt 7,273 8,156 12.1 2,000 24.5

ExpenditureNon-plan expenditure 7,361 8,216 11.6 2,847 34.6Non-plan expenditure (Excl Int) 4,874 5,808 19.2 1,902 32.7

NP-Revenue 6,436 7,267 12.9 2,391 32.9Interest 2,487 2,408 -3.2 945 39.2

NP-Capital 925 948 2.5 456 48.1Plan expenditure 3,731 3,950 5.9 1,451 36.7

P-Revenue 3,151 3,269 3.7 1,140 34.9P-Capital 580 681 17.5 310 45.6

Total expenditure 11,092 12,166 9.7 4,297 35.3T-Revenue 9,587 10,537 9.9 3,531 33.5T-Capital 1,505 1,629 8.3 766 47.0

Fiscal surplus/(deficit) -3,819 -4,010 5.0% of GDP -5.5 -5.1

Revenue surplus/(deficit) -2,765 -2,698 -2.4% of GDP -4.0 -3.4

Primary surplus/(deficit) -1,332 -1,602 20.3% of GDP -1.9 -2.0

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Government still has scope to improve on numbers

Petroleum subsidies lower by 38% for FY12BE

§ Price increases in the fuel items

§ Diesel price deregulations

§ Customs duties left unchanged – may be tinkered with later on

Fertiliser subsidies lower by 9% for FY12BE

§ Replicating NBS regime for Urea also

§ The subsidy estimate for imported/indigenous fertilisers at Rs202bn (Rs214bn in FY11RE) despite naphtha, fuel oil prices moving up

Augment revenues through getting parallel economy to mainstream

“89. The Ministry of Finance has commissioned a study on unaccounted income and wealth held within and

outside our country. It would suggest methods to tax and repatriate this illicit money.”

§ Does it mean a VDIS can be announced later on???

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Direct Tax Proposals

Direct tax proposals – Corporate

§ No change in corporate tax rate

§ Surcharge on domestic companies reduced from 7.5% to 5%, MAT increased from 18% to 18.5%of the book profits. SEZ brought under preview of MAT

§ Tax rate of on dividends received by an Indian company from its foreign subsidiary reduced from maximum

marginal rate to 15%.

§ Mutual funds (debt market) will have to pay additional tax on income distribution at 30% as compared to current rate of 20%

§ Weighted deduction on payments made to National Laboratories, Universities and Institutes of Technology to be

enhanced from 175 to 200 per cent.

§ Benefit of investment linked deduction extended to businesses engaged in the production of fertilizers & businesses developing affordable housing

§ Hotel and Hospitals allowed the benefit of setting of losses from new units (commence operation after

01/04/2010) against profits of existing units

§ Benefits under Section 80IA extended by one year to 31st March 2012 for power sector

§ Direct Taxes Code (DTC) to be finalized for enactment during 2011-12. DTC proposed to be effective from April 1, 2012

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Direct Tax Proposals

Direct tax proposals – Individual/Small Businesses

§ Exemption limit for the general category of individual taxpayers enhanced from Rs 1,60,000 to Rs 1,80,000 giving uniform tax relief of Rs2,060.

§ For Senior Citizens, Exemption limit enhanced from Rs. 2,40,000 to Rs. 2,50,000 and qualifying age reduced from 65 to 60 years. Higher exemption limit of Rs. 5,00,000 introduced for Very Senior Citizens, who are 80

years or above.

§ Tax deduction of Rs. 20,000 for investment in long-term infrastructure bonds (over and above Rs. 1,00,000 exemption) proposed to be extended for one more year.

Above Rs 800,000 30Above Rs 500,000

Rs 500,000 to Rs 800,00020Rs 300,000 to Rs 500,000

Rs 180,000 to Rs 500,00010Rs 160,000 to Rs 300,000

Upto Rs 180,000 Lacs0Upto Rs 160,000 Lacs

New SlabTax Rate (%)Old Slab

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Indirect Tax Proposals - Customs

§ Custom duty on Petcoke and Gypsum reduced to 2.5%.

§ Reduction in basic custom duty for specified agriculture machinery from 5% to 2.5%.

§ Custom duty exemption and concessional rate of excise duty extended to batteries imported by manufacturers

of electrical vehicle.

§ Export duty on iron ore finds and iron ore lumps hiked to unified rate of 20% ad valorem from currently 5% and 15% respectively.

§ Reduction in the custom duty on solar lantern from 10% to 5%.

§ Crude palm stearin used in manufacturing of laundry soap fully exempted from basic custom duty.

§ Reduction in custom duty on micro irrigation equipment from 7.5% to 5%.

§ Machinery used for highway development projects will qualify for custom exemption similar to that claimed by tunnel boring machines which are used for Hydro electric projects

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Indirect Tax Proposals - Excise

§ Maintained central excise duty at standard rate of 10%

§ Excise duty on LEDs lowered to 5% and special CVD being fully exempted

§ Lower rate of central excise duty increased to 5% from 4% earlier

§ Excise duty exemption for equipment supply to mega/ultra power projects

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Indirect Tax Proposals – Service Tax

The following services have been brought under the ambit of service tax:

§ Services provided by air conditioned restaurants having a license to service alcoholic beverages in relation to

serving food/ beverages

§ Short-term accommodation provided by a hotel, guesthouse, club or campsite, or other similar establishment for a continuous period of less than 3 months

§ The above services will come into effect post the enactment of Finance Bill, 2011

§ All services, including doctor fees & diagnostics services, provided by centrally air conditioned clinical units

having more than 25 beds

§ In life insurance space, tax shall be charged on the portion of the premium other than the investment amount, when the break-up of premium is shown separately

§ The scope of legal consultancy services is being expanded by including service provided by a business entity to individuals in relation to advice, consultancy or assistance in any branch of law

§ Exemption is being provided to services provided by an organizer of business exhibitions held outside India. Also services related to transportation of goods by roads, rail or air when both the destination and the origin are

located outside India is being exempted

§ A modified scheme is being developed to refund service tax to SEZ developers

Withdrawal or Amendments of Exemptions (effective from 1st Apr, 2011):-

The rates on service tax on travel by air are revised as follows:

a) domestic travel (from Rs100 to Rs150)

b) International travel (from Rs500 to Rs700)

c) domestic travel, other than economy class (10% standard rate)

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Sectoral Impact

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Agri-input & Chemicals - Positive

§ Fertiliser industry to be given the status of infrastructure and any new investment will be entitled for benefit

under section 35-AD for accelerated depreciation along with some custom benefit

§ Fertiliser subsidy for FY11-12 budgeted at Rs 500 bn, below our estimates of Rs 800 bn – as against previous

year subsidy of Rs 550 bn

§ Agriculture lending increased to Rs 4,750 bn (Rs 3,750 bn previous year) in line with estimates while interest

rate subvention of 3% (previous year 2%) with effective interest rate of 4% is positive for the overall sector

§ Excise duty on chemicals unchanged at 10% is positive for the sector. Reduction in custom duty on caprolactam

/ nylon chips from 10% to 7.5% - likely to have adverse impact

GSFCChambal Fertilisers, Tata Chemicals


It is positive since industry was expecting

increase in excise rates by 2%

Current excise duty rates to continueExcise duty on chemicals at 10%

Benefit of lower tax rates and custom dusty

benefits

Fertiliser sector to enjoy infrastructure statusNo extra benefit for capital investment in

fertiliser sector

Subsidy is lower than our estimates. May

result in lower rates under NBS or increase in

prices to the farmers

Subsidy proposed at Rs 500 bnFertiliser subsidy revised at Rs 550 bn

ImpactProposalsCurrent Status

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Automobiles - Positive

§ Status quo maintained with respect to excise duty. A positive for the sector as there were expectation of

increase in excise duty for the auto sector

§ We expect margins to surprise on the upside as no hike in excise duty provides room for raising selling prices to protect against cost pressures from commodity and conversion cost

§ Mutual funds (debt market) will have to pay additional tax on income distribution at 30% as compared to current rate of 20%. This will have marginal impact on the treasury yield of cash rich companies like Maruti, Bajaj Auto, Hero Honda and M&M

§ Indirect benefits continue in the form of increased focus on improving road infrastructure and rural economy

§ The biggest beneficiaries are TVS Motor, Maruti, Ashok Leyland and M&M (higher delta effect to change in excise duty) as reflected by sharp stock price corrections

Ashok Leyland, Bajaj Auto, Hero Honda, M&M,

Maruti, Tata Motors and TVS Motor


No changeExcise duty on UVs/large cars – 22%+Rs

15,000

Positive as there were expectation of increase

in duty

No changeExcise duty on two wheelers three wheelers,

small cars and commercial vehicles -10%


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§ Flat govt borrowing at Rs3.43tn for FY12 and increase in the FII limits for investment in infra augurs well for

PSU banks – most of them hitting limits on infra lending

§ Interest subvention on short term farm credit raised from 2% to 3%, effective interest rate of 4%

§ Existing limits on house price raised to Rs2.5mn from Rs2.0mn for interest subvention of 1%

§ Provide Rs60bn during FY12 to enable PSB’s to maintain a minimum Tier I CAR of 8 %

§ Agriculture credit at Rs4750bn, up 27%

§ Budget also spelled reforms in financial sector including FDI in Insurance, though didn’t elaborate

§ No mention of SBI rights issue in the planned investments in public enterprises

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Andhra bank, IOB, Union bank, UCO bank,

PNB, BOB, Bank of Maharashtra, BOI

Positive for banks with lower tier I ratioRecapitalisation fund of Rs60bn

Positive for Pvt sector banks and banks which

has insurance subsidiaries

Proposed to move Insurance bill and banking

amendment bill

Dewan Housing, Gruh Finance, LIC Housing

Finance, HDFC, ICICI Bank, SBI


Positive for HFCs particularly ones with lower

ticket size

Home loan subvention - loan value at Rs1.5mn

and house price at Rs2.5mn

Home loan subvention - loan value at Rs1mn

and house price at Rs1.5mn

Positive for all banksProposed central electronic registry under

SARFAESI Act

Positive for bond yields and liquidity so good

for PSU banks

Government borrowings at Rs3.43tn, FII

investments in infr lending at USD25bn, overall

at USD40bn

Government borrowings at Rs3.35tn, FII

investments in infr lending at USD5bn, overall

at USD20bn


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Cement

§ Excise duty on packaged cement with MRP> Rs190/bag (Exceeding Rs3800/ton) has been revised from ‘10%

of retail sale price’ to ‘10% ad valorem (Ex-factory) +Rs8/bag (Rs160/ton)’. Excise Duty on cement with MRP

<Rs190/bag (not exceeding Rs3800/ton) been revised from Rs290/ton (specific) to 10% ad valorem (Ex-factory)

+Rs4/bag (Rs80/ton). Excise duty on clinker revised from Rs375/ton to 10% ad valorem +Rs200/ton.

Impact : Negative – Duty to go up by Rs2/bag if net realisation is calculated with Freight. NEUTRAL If

calculated ex freight.

§ The basic customs duty on petcoke & gypsum is proposed to be reduced to 2.5 per cent ( 5% earlier). Similarly

customs duty on Rayon Grade wood pulp (RGWP- raw material for manufacturing VSF) reduced to 2.5% (5%

Earlier) Impact: Marginally Positive as petcoke & gypsum at industry level does not form significant part of

cost. Reduction in duty on RGWP will be Positive for Grasim as it imports 60% of its requirement from its

International subsidiaries and international markets.

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Cement

Negative – Duty to go up by Rs2/bag if net realisation is calculated with Freight.

Change in excise duty structure Neutral If calculated ex freight.

Reduction in customs duty on pet coke & Gypsum marginally positive for companies. Shree Cement Could be beneficiary as it entirely uses petcoke

Neutral as very small proportion of cement sold below MRP of Rs190/bag

10% ad valorem + Rs8/bag or Rs160/tonExcise duty on cement below Rs190 @ 290/ton

Change in Excise duty structure for clinker Marginally Negative for Ultratech & Shree Cement

Reduction in duty on RGWP will be positive for Grasim as it imports 60% of its requirement from International subsidiaries and markets


Marginally PositiveReduced from 5% to 2.5%Custom duty on Gypsum & petcoke

Marginally Negative for Ultratech & Shree Cement

10% ad valorem + Rs200/tonExcise Duty on clinker @ Rs375/ton

Negative – Duty to go up by Rs2/bag if net realisation is calculated with Freight. Neutral If calculated ex freight.

10% ad valorem + Rs4/bag or Rs80/tonExcise duty on cement MRP above Rs190 @ 10%


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Engineering & Capital Goods - Neutral

§ Continued thrust on Infrastructure development with 23% increase in plan allocation to Rs2140 bn – (a) Power –up 23% to Rs1555 bn (b) Roads & Bridges – stable at Rs448 bn (c) Urban development – down 5% to Rs82 bn (d) Water & Sanitation up 4% to Rs100 bn (e) Irrigation - up 37% to Rs5.7 bn

§ Allocation to Bharat Nirman increased 21% to Rs580 bn – (a) No change in Indira Awas Yojana at Rs100 bn (b) Rajiv Gandhi Grameen Vidyutikaran Yojana - up 9% to Rs60 bn, (c) Pradhan Mantri Gram Sadak Yojana – up 74% to Rs200 bn

§ Measures mooted for easing funding constraints – (1) IIFCL disbursement target increased 25% to Rs250 bn (2) 50% increase in amount raised through tax free bonds to Rs300 bn (3) Allowed FII investment in Infrastructure SPV and corporate bonds and (4) Projects worth Rs50 bn sanctioned under take-out financing

§ Cold storage chains & warehouses accorded infrastructure status – Planned development of 15 mega food parks & 107 cold storage projects by National Horticulture Board

§ Import Duty and Excise Duty parity brought-in for equipment supply to Mega & UMPP projects -- for expansion at existing projects (anomaly resolved in current budget) and new projects (already applicable)

§ Benefits under section 80IA for (1) power developers (2) laying of transmission and distribution lines – extended by one year – upto 31st Mar’12

Cummins India, Greaves Cotton, Punj Lloyd, Elecon Eng, McNally Bharat, TRF

L&T, BHEL, Thermax, Voltas, Blue Star


Positive for Blue Star, VoltasFully ExemptExcise Duty @ 10% on Commercial Refrigeration for Cold Chains

Positive for LMW, VoltasReduced to 5%Excise Duty @ 10% on spec. textile machinery

Positive for L&T, BHEL, Thermax, McNally Bharat, TRF, Elecon Engineering

Reduced to 2.5% - parity with Customs DutyExcise Duty @ 10% on Equipments supplied to expansion of UMPP / Mega Power projects


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FMCG – Neutral

§ Increase in allocations to development and social programs for rural India - like Indira Gandhi Vikas Yojana, Bharat Nirman, Indira Awas Yojana and Rajiv Gandhi Krisi Vikas Yojana – also various development initiative

for agriculture and rural infrastructure - likely to increase propensity to consume

§ Increase in personal income tax exemption limits from Rs 160,000 to Rs 180,000 - tax savings of Rs 2,000 leading to increase in disposable income, which could boost consumption

§ Cenvat rate remains unchanged at 10% versus expectations for 2% increase- No impact for FMCG companies

§ No change in Excise Duty on Cigarettes versus expectation of marginal increase – higher predictability on earnings of Cigarette companies

§ Increase in Excise Duty on specified goods from NIL rate to 1% duty without Cenvat or 5% duty - Categories covered are branded jewellery, water filters, sanitary napkins, diapers, ready to eat packaged food, margarine,

ketchup, sauces, fruit juice, soups, etc.

§ Full exemption of basic Customs Duty from 20% to NIL rate for Crude Palm Stearin used in manufacture of laundry soap

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FMCG – Neutral

Neutral for FMCG sectorNo ChangeCenvat at 10%

Neutral for FMCG sectorNo ChangeService Charge at 10%

Negative for GCPL, Marico, DaburIncreased to 18.5%MAT Rate is 18%

Neutral for HUL, GCPL, 1% Excise without Cenvat OR 5% Tariff with

Cenvat

NIL Excise Duty on Specific Goods

Godrej Consumer, Marico, TitanITC, Godfrey Philips, HUL


Positive for HUL, ITCReduced to NIL rateCustoms Duty on Crude Palm Stearin is 20%

Positive for ITC, Godfrey PhillipNo ChangeExcise Duty on Cigarettes


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Infrastructure

§ Overall budgetary allocations to infrastructure development up 23% from Rs 1730 bn to Rs 2140 bn

§ Allocation for Bharat Nirman up 21% to Rs 580bn with key focus on Rural Road up 74% to Rs 200 bn

§ Allocation for power sector up 23% to Rs 1554 bn and Railways up 41% to Rs 566 bn

§ Allocation for Roads and highways stays flat at Rs 448 bn, allocation to NHAI at Rs 178 bn largely flat, however allowed NHAI to raise tax free bonds of Rs 100 bn clearly implying focus development through NHDP

§ MAT rate increased from 18% to 18.5% - marginally negative for infrastructure sector, however clubbing the

reduction in surcharge it will lead to an increase in the effective tax rates by 7bps from 19.93% to 20.0%

§ Sunset to the exemption granted to SEZ’s from 1st June 2011 in terms of MAT exemptions and exemptions from the application of DDT provision will be big negative for fresh investments in the SEZ development

§ Extension of additional Rs 20,000 in computing the total income under Sec 80CCF for one more year till Mar-12

§ Increase in FII limit in Bond market by additional USD 20 bn to USD 40 bn, Within the infrastructure sector the limit has been raised from USD 5 bn to USD 25bn considering the long term funding needs

§ To facilitate the setting up of dedicated infrastructure debt fund, the finance bill is seeking an enabling power to amend Sec 10 of income tax act for notifying any infrastructure debt fund which is established in accordance with prescribed guidelines. It is also proposed that any interest received from such debt fund shall be taxable at 5% of

on the gross interest income

§ IIFCL on track to achieve a disbursement of Rs 200 bn by Mar-11, and will reach a cumulative disbursement of Rs 250 bn by Mar-12. Targets for fresh sanctions under the take out financing raised to Rs 50 bn for FY11-12

§ The Delhi Metro – III and Mumbai Metro Link – III will be taken up in 2011-12 and ongoing projects in Bengaluru, Chennai and Kolkata will be provided financial assistance for speedy implementation

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Infrastructure

Neutral - IRB Infra, IL&FS Transportation,

IVRCL, GMR Infra, GVK Power, Ramky Infra

Mat Increased to 18.5% and Surcharge

reduced to 5.0%

MAT Rate @ 18.0% and Surcharge at 7.5%

Negative - GMR Infra, GVK Power, Ramky

Infra

SEZ and SEZ developers brought under the

purview of MAT and dividend distribution tax

SEZ and SEZ developers exempted from MAT

and dividend distribution tax

Positive - Positive for entire sector will result in

easing funding constraints

Sec 80 CCF Investment in long term

infrastructure bond extended till Mar-12

Sec 80 CCF Investment in long term

infrastructure bond expiring on Mar-11

Positive - Positive for entire sector will result in

easing funding constraints

Proposed to provide enabling power to the

central govt to exempt infrastructure debt fund

set up in accordance with the prescribed

guidelines

No provision for dedicated Infrastructure Debt

Fund

Positive - Positive for the entire infrastructure

sector as will offer another avenue to fund

projects

Limit increased to USD 25 bnFII limit in infra Bond limited to USD 5 bn

Negative - Negative for awarding at NHAI,

however, focus will be on private participation

NHAI allocation increased marginally to 178 bn

for FY11-12

NHAI allocation at 176 bn for FY10-11

Positive - IL&FS Transportation, Ramky InfraAllocation for provisions to North Eastern

region and Sikkim increased 9% to 19.9 bn

Provisioning for North Eastern region and

Sikkim for road development at Rs 18.3 bn

GMR Infrastructures, GVK Power & InfraIRB Infra, IL&FS Transportation, Ramky Infra,

Era Infra



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IT – Software – Neutral

§ Union budget remained silent on extending the tax benefits under Section 10A/10B of the Income Tax Act’1961

beyond March’11, as expected.

§ Union Budget 2011 has introduced a sun set clause to exemption from MAT from March31’2012 for SEZ units.

This will have no P&L impact , however would impact cash flows negatively as companies would be allowed to

create deferred tax assets to be setup against future tax liabilities.

§ No change in overall tax rates from increase in MAT rate( 18.5% V/s 18% currently) as it gets negated by

reduction in surcharge to 5%( V/s 7.5% earlier)

All Companies


Effective Tax rate remains unchanged at ~20%Increase MAT to 18.5% of book profits. Corporate Surcharge reduced to 5%

MAT at 18%, Corporate Surcharge at 7.5%

EPS neutral, however cash flow negative for almost all the Indian IT companies as they create deferred tax assets to be offset against future tax liabilities

Sun set clause has been introduced for exemption from MAT for SEZ units from March 31’2012

SEZ units exempt from MAT under section 115JB (6)

Neutral for the IT companies as street estimates largely factor in increase in tax rates from FY12 onwards driven by expiry of Section 10A/10B benefits

Budget remains silent on the sameTax Exemption for STPI units under Section 10 A/10 B for 10 years or March 31’2011 whichever is earlier


28

Media - Neutral

§ No change in the FDI limit

§ No change in service tax with respect to broadcasting industry

§ The concessional basic customs duty of 5% and CVD of 5%, presently applicable to high-speed printing

presses imported by newspaper establishments is being extended to mailroom equipment

All Companies


No impactUnchangedFDI limit of 49% in DTH and cable, 26% in news affairs, broadcasting & print and 20% in radio sector


29

Metals & Mining- Negative for iron ore exporters

Export duty on iron ore hiked to 20%

§ Export duty on iron ore fines and iron ore lumps hiked to unified rate of 20% ad valorem from currently 5% and 15% respectively. This is significantly negative for Sesa Goa (Rs 11 bn reduction at the FY12E EBITDA level translating to loss of Rs 8/ share on the FY12E EPS), as the company exports ~90% of their produce. Marginal impact would be on NMDC, due to negligible exports

§ The impact on domestic steel manufacturers would be neutral, as availability of iron ore fines is not a constraint in India

Basic custom duty increased on all ores and concentrates from 2% to 2.5%

§ This would have neutral to marginally negative impact on Sterlite Industries, as it imports copper concentrates for smelting

§ Slightly positive for companies with mining assets in India- MOIL, Hindustan Copper, Hindustan Zinc

Custom duty on ferro nickel reduced to 2.5% from 5% and exempted fully on stainless steel scrap

§ Positive for stainless steel producers like JSL Stainless

MAT rate is hiked from 18% to 18.5%

§ Very marginal negative impact would be there on Sterlite Industries, Hindustan Zinc and Godawari Power and Ispat

Surcharge on corporate tax reduced to 5% from 7.5%

§ This is a positive development for the companies. Hike in MAT rate would be offset by the reduction in surcharge on corporate tax

30

Metals & Mining- Negative for iron ore exporters

Negative for Sesa Goa (estimated loss of Rs 8/

share on FY12E EPS)

Uniform export duty of 20% on both fines and

lumps

Export duty on iron ore fines and lumps- 5%

and 15% respectively

Neutral to marginally negative for Sterlite

Industries, positive for MOIL, Hindustan

Copper, Hindustan Zinc

Hiked to 2.5%Basic custom duty on all ores and

concentrates at 2%

Slightly positive for stainless steel producers

like JSL Stainless

Reduced to 2.5%Custom duty on ferro nickel at 5%

Sesa Goa, Sterlite industriesAll the steel companies, Hindustan zincMOIL, Hindustan copper, JSL Stainless


Positive for all the companies, to offset hike in

MAT rate

To be reduced to 5%Surcharge of 7.5% on corporate tax

Marginally negative for Sterlite Industries,

Hindustan Zinc, Godawari Power and Ispat

To be hiked to 18.5%MAT rate at 18%


31

Oil and Gas

§ No change in custom and excise duty on crude oil and petroleum products especially Petrol & Diesel - Maintain

status quo

All Companies


No ImpactUnchanged Custom duty of 5% on crude oil and 7.5% on

Petrol and diesel. Central excise duty on Petrol

and Diesel at Rs.14.4/ltr and 4.6/ltr

respectively.


32

Paper - Neutral

§ Concessional excise duty rates applicable for paper sector increased from 4% to 5%

§ MAT rate increased from 18% to 18.5% which is negative for paper companies, however reduction in income

tax surcharge from 7.5% to 5% to set off the impact of the same

§ Import duty on Rayon Grade Pulp (RGP) has been reduced from 5% to 2.5% which should have adverse impact

on BILT. However there is significant discount between imported RGP prices and domestic realisations

§ Custom duty on waste paper reduced from 5% to 2.5%

BILTTNPL, JK Paper


Should have negative impact on RGP

realisations however domestic realisations are

at significant discount to global prices

Reduced to 2.5%Import duty on RGP at 5%

Impact of higher MAT rates to be set off

against lower surcharge

MAT rate increased to 18.5% while income tax

surcharge reduced to 5%

MAT rate at 18% and income tax surcharge of

7.5%

It will have marginal negative impact on all

paper companies since impact of higher excise

duty is likely to be passed on

Excise duty increased to 5%Excise duty at 4%


33

Pharma – Negative

§ All units in SEZ are proposed to pay MAT at 18.5%. This will have negative impact on almost all the domestic

pharma companies having operations in SEZ. Exact quantum of impact cannot be ascertained for each

company.

§ Weighted deduction for research programs from National Agencies has been increased to 200% from 175%.

This will have positive impact on companies sourcing work from National Laboratories.

§ All healthcare services, including doctor fees & diagnostics services, provided by centrally air conditioned

clinical units having more than 25 beds will be charged under service tax.

Almost all domestic pharma companies

operating in SEZ

Biocon / DishmanNone


Marginally positive for large pharma

companies in the area of HIV and rare cancer

medications as these drugs contribute a

smaller proportion of the overall sales

Reduced to 5%Customs duty on life saving drugs at 10%

Positive for pharma companies sourcing work

from National Labs/ IIT

Increased to 200%Weighted deduction for research programs

from National Agencies at 175%

Negative for almost all the domestic pharma

companies as they have operations in SEZ.

Difficult to ascertain the quantum of impact for

each company

Units in SEZ liable to pay MATTax holiday for units in SEZ


34

Power

Negative for Adani Power; largely neutral for other power utilit ies

§ Adani power would be impacted by levy of tax on SEZ developers and units operating in them. Current valuations seems to imply zero tax liability for Mundra for initial 5 years. Levying of MAT rate to reduce NPV of Adani power by 5-8% depending on assumptions of MAT credit and profit available for set off from other plants. However, merger of Adani power with any other company (paying higher taxes) might avoid MAT payment.

§ 80IA has been extended by 1 year to 31st march 2012 - positive for power utilities.

§ Excise duty exemption for equipment supply to mega/ultra mega power projects - positive for power utilities as capital cost are likely to reduce.

§ Concessional rate of 5% customs duty and 5% CVD for parts and components for high voltage transmission equipments - positive for T&D equipment companies.

Positive for power utilities in the long term as capital cost will reduce

Excise duty exemption for equipment supply to mega/ultra mega power projects

Excise duty payable on equipment supply to mega/ultra mega power projects

Negative for T&D companiesAPDRP and RGGVY outlay of Rs20.3bn (down 45%) and Rs60bn (up 9%)

APDRP and RGGVY- budget outlay of Rs37bn & Rs55bn

Positive for T&D equipment companies.Concessional rate of 5% customs duty & 5% CVD

7.5% customs duty and 7.5% CVD for parts & Components for high voltage transmission equipments

Adani Power Ltd, T&D Companies (except for custom duty reduction)

NTPC, Lanco Infra, Reliance Power ,JSW Energy, Jaiprakash Power, Nava Bharat Ventures, KSK, GIPCL


Positive for power utilities as tax holidays would continue to be available

Has been extended by one year to 31st March 2012.

Section 80IA terminal date –up to 31.03.2011

To Impact Adani Power - NPV impact of about 5-8%

Levy of MAT on SEZ developers and units operating in them, FY13 onwards.

No MAT levy on SEZ developers and units operating in them


35

Telecom - Negative

§ MAT rate increased from 18% to 18.5% - Minuscule impact on the earnings of telecom companies

§ Extended the concession available to parts, components and accessories for manufacture of mobile handsets

till 31st March, 2012 and to include few more items in its bouquet

§ Planned to provide Rural Broadband Connectivity to all 2,50,000 panchayats in the country in three years.

Bharti, Idea, Rcom


Negative – Earnings to get impacted marginally

Increased MAT from 18^% to 18.5%Telecom companies fall under MAT Which is currently 18%


36

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