Budget 2011-12 Preview

Tightrope walking

Emkay Global Financial Services Ltd.

Emkay Research Team

16 February, 2011
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Further stimulus rollback likely

Rollback of excise duty likely in select sectors

The pre-crisis excise duty at 14% was cut to 8% after the fiscal stimulus, and currently stand at 10%. With strong
growth in sectors like small cars and low inflation in man-made fibers, the rate may be raised to 12%. In large cars
and UV also the excise duty may be raised

Likely rollback of service tax and including more services

The service rates was spared in last budget and looking at the strong growth in services coupled with 16% GST
rates in future, service tax may be increased to 12%. This would also not impact the inflation as much as the excise
duty increase. There may be inclusion of more services under service tax

Customs duty on petroleum products may be reduced

With steep inflationary pressures building up in fuel items and rising subsidy bill, the customs duty on crude
oil/petrochemicals/fuel products may be reduced/waived. The current duty rates are: crude oil – 5%, auto fuel –
7.5% and other petrochemicals – 10%

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Fiscal deficit to be under pressure

No bonanza revenues next year

The unexpected 3G bonanza of ~Rs.720bn had acted as a buffer to absorb a good part of the fiscal deficit in FY11.
Come FY12, such unexpected deficit support is not foreseen. Fiscal deficit for FY12 is likely to spill over the target.

Subsidies to see an increase

We expect the total subsidy bills on food/fertilisers/fuels to go up by ~Rs800bn from the budgeted estimates. The
petroleum subsidy would see a drastic uptick if the price of crude were to increase through FY12. This would
undermine the ability of the government to tame the fiscal deficit and consequently inflation.

Price dependent subsidy burden Rs. Bn % of GDP

Oil price at $80 361 0.51
Oil price at $90 438 0.62
Oil Price at $100 511 0.73

Augmentation of revenues to be key thing

In such scenario, key thing to focus will be augmenting the revenues which may include
§ Raising excise duty/customs duty rates in few products
§ Raising service tax rate
§ Introduction of voluntary disclosure of income scheme

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Fiscal deficit to be under pressure (Cont’d…)

Government accounts
FY10 FY11BE FY11RE FY12BE
Receipts
Revenue receipt 5,773 6,822 7,904 8,316
Tax (net) 4,651 5,341 5,723 6,985
Non tax 1,122 1,481 2,181 1,331 FY11BE on tax revenues to be
Capital receipt 302 451 451 311 overshot by ~Rs350bn
Revcovery of loans 43 51 51 51
Others 260 400 400 260
Total receipt 6,075 7,273 8,355 8,627

Expenditure
Non-plan expenditure 7,064 7,361 8,161 8,599
Non-plan rev expenditure (Excl Int) 4,037 3,949 3,949 4,028 Including the excess subsidies of
Revenue 6,419 6,436 7,236 7,600 Rs800bn each in FY11RE/12BE
Interest 2,195 2,487 2,487 2,771
Additional Subsidy 187 0 800 800
Capital 644 925 925 999
Plan expenditure 3,152 3,731 3,731 4,262
Revenue 2,644 3,151 3,151 3,624
Capital 508 580 580 638
Total expenditure 10,215 11,092 11,892 12,860
Revenue 9,064 9,587 10,387 11,224
Capital 1,152 1,505 1,505 1,637

Fiscal surplus/(deficit) (4,140) (3,819) (3,537) (4,233)

As % of nominal GDP -6.7% -5.5% -5.1% -5.4%

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Agri-input and chemicals

Last Budget
§ Fertiliser subsidy for FY10-11 budgeted at Rs 500 bn, a tad lower than subsidy of Rs 530 bn in FY09-10.
Government also assured of disbursing all subsidy in cash as against partial payment in bonds in previous
years
§ Introduced Nutrient Based Subsidy (NBS) scheme on DAP / complex fertilisers resulting in fixed subsidy –
floating price regime – enabling all complex fertiliser companies to charge their own prices to the farmers
§ Urea prices increased by 10% to the farmers with effect from April 2010
§ Excise duty on chemicals was rolled back from 8% to 10%

Changes during the year

§ Upward revision in budgetary provision for fertiliser subsidy by Rs 50 bn to Rs 550 bn under second
supplementary grant due to high fertiliser prices throughout the year. However estimated fertiliser subsidy for
FY10-11 now stands at Rs 800 bn
§ Reduction in subsidy rates for DAP / complex fertilisers under NBS by ~20% effective from Apr 1st 2011 –
however the same has been rolled back due to high raw material prices globally

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Agri-input and chemicals (Cont’d…)

Industry wish list

§ Rural development schemes like NREGA, Rural Infrastructure Development, thrust on irrigation projects etc
should continue
§ Fertiliser subsidy for FY10-11 should be revised to Rs 800 bn and subsidy provisioning for FY11-12 should be
similar, considering growing fertiliser demand and rising raw material prices
§ Urea should be brought under the NBS with adequate policies to reward efficient players. Gas based players
can be compensated through gas pooling arrangements while non-gas based players should be compensated
for their high input cost – up until adequate infrastructure for gas is in place
§ New Investment Policy for urea should be introduced to address the issue of poor return on investments.
Alongside, the government should also make provisions to ensure long term availability of gas
§ Maintain excise and custom duty on chemicals at present level

Our expectations
§ Thrust on rural development programmes to continue with sustained focus on irrigation, disbursement of agri
credit etc
§ NBS to be introduced partially for urea as we expect new investment policy for urea to be formulated
§ Expect excise duty on chemicals to be increased from 10% to 12%

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Auto

Last budget
§ Increase in excise duty by 2%

Industry wish list

§ No increase in excise duty rate
§ Reduction in disparity of excise duty between small cars and large cars/UVs.

Our expectations
§ We expect increase in excise duty rates atleast for some segments of the auto industry. We do not rule out
lower excise duty hike/no hike in case of two wheelers and CVs vis a vis that for cars (especially large cars) and
UVs.

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Banking and financial services

Last budget
§ Fiscal deficit higher at 5.5% of GDP for FY11 with net government borrowing of Rs3.5tn
§ Extension of interest subvention on export credit of 2% on pre-shipment credit and Interest subvention on
farmers credit increased to 2%
§ Continuing the take out financing by IIFCL
§ Increase in recapitalisation funds to Rs165bn
§ Agriculture credit at Rs3750bn, up 15%
§ Remarks on possibility of banking licenses being given to private players including NBFCs

Industry wish list

§ Reduce the tenure limit for tax exempt deposits from five years to three years
§ Continuing of the interest subvention on pre-shipment credit and farm credit
§ Some package for state electricity boards as they are facing severe liquidity crunch

Our expectations
§ The deficit likely to be at Rs3.9tn or 4.9% of GDP; a flat borrowing figure should be positive for bond yields
§ Reduction in tenure for deposits may not happen
§ Package for SEBs may be given as it may result in NPAs otherwise
§ The farm credit targets to be set at Rs4250-4500bn
§ Interest rate subvention on farm credit may continue but on pre-shipment credit may be removed
§ Some measures to increase the depth and liquidity in the corporate bond market
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Capital Goods and Infrastructure

Last Budget
§ Budgetary allocation increased for – (1) Bharat Nirman (+6% to Rs480 bn) (2) JNNURM (-10% to Rs116 bn), (3)
APDRP (+78% to Rs37 bn), (4) Roadways (+13% to Rs199 bn) (5) Railways (+6% to Rs168 bn) and (6)
Renewable energy (+61% to Rs10.0 bn)
§ Financing of infrastructure projects fast-tracked through the medium of IIFCL - Aggressive targets set for IIFCL (1)
disbursements to improve from Rs90 bn in FY10 to Rs200 bn in FY11E, (2) refinancing to banks to increase from
Rs30 bn to Rs60 bn and (3) take-out financing to increase to Rs250 bn
§ MAT rate increased from 15% to 18% - negative for infrastructure developers
§ Deduction u/s 80 CCF for an additional Rs 20,000 in long term tax saving infrastructure bonds, over and above
the Rs 1 lakh limit prescribed u/s 80C

Industry wish list

§ Continued thrust on development spending i.e. higher allocation to flagship programs of Bharat Nirman,
JNNURM, APDRP, NHDP, AIBP and renewable energy resources
§ Enabling policies along with clear roadmap to expedite roll-out of infrastructure projects i.e. clearance of land,
statutory, environment, etc
§ Reduction in MAT rate - currently applicable at 18%
§ Section 80IA and 80IB – extension of time limit to avail fiscal benefits for projects been commissioned beyond
March 2011
§ To eliminate the cascading effect of double taxation in case of dividend distribution tax for corporate adopting
more than single tier structure
§ Selectively raise import barriers for capital equipment, especially power equipment – to facilitate domestic players
§ Enabling policies to increase capital flows to the infrastructure sector at lower financing costs- similar lines of
infrastructure bonds issued in FY10-11 providing additional tax exemption of Rs20,000 to investors 9
Capital Goods and Infrastructure (Cont’d…)

Our expectations
§ Thrust on infrastructure and asset creation - expect higher allocation to flagship programs of Bharat Nirman,
JNNURM, APDRP, NHDP, AIBP and renewable energy resources. Expect special focus on Road, Bridges, Water
Sanitation & Urban infrastructure.
§ Expect 2% increase in Cenvat rate from 10% to 12%- would be applicable to capital goods at large
§ Import barriers for capital equipment (specifically power) unlikely to be raised – in light of substantial slippages in
achieving the 11th plan targets for capacity addition
§ MAT rate would remain unchanged, owing to fiscal management
§ Take-out financing mechanism from IIFCL has not achieved desired objective. The key issue is competitiveness
of IIFCL versus commercial banks. Thus, 2011-13 budget will objectively try to address the above shortcomings
and help IIFCL achieve stated objective
§ Expect enactment of enabling policies to expedite roll-out of infrastructure projects
§ Benefits under Sec 80IA and 80IB likely to be extended – extension of time limit to avail fiscal benefits for projects
been commissioned beyond March 2011
§ Deemed export status for equipment supply to high priority infrastructure projects
§ Easing ECB norms especially for infrastructure projects– to attract debt funds into the sector

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Cement Industry

Last budget
§ Excise duty on cement with MRP above Rs190/bag @ 10% a. For cement sold below Rs190/bag excise duty
Rs290/ton
§ Excise duty on clinker hiked from Rs300/ton to Rs375/ton
§ Clean energy cess of Rs50/ton imposed on coal

Industry wish list

§ Industry has sought a uniform rate of Excise Duty on Cement as compared to differential rate of excise duty on
cement sold above or below MRP of Rs190/bag
§ Abatement of 55% on Excise duty levied on MRP basis
§ Import duty on coal/pet coke and gypsum be abolished, in line with principle that duty on raw material be higher
than duty on finished product
§ VAT on cement and clinker (currently at 12.5%) be brought down to 4 % in line with steel, and cement be
included in the ‘Declared Goods’ category
§ Royalty paid on limestone and duty/cess paid on indigenous coal be allowed as credit – either as Cenvat credit
or as VAT credit.

Our Expectations
§ We expect industry’s demand of uniform excise duty will get some ears from Govt.
§ On rest all we expect the Govt to maintain status quo.

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FMCG

Last Budget
§ Increase in allocations to social and development programs aimed for rural India – like Indira Gandhi Vikas
Yojana, NREGA, Bharat Nirman, Indira Awas Yojana and Krishi Vikas Yojana
§ Increase in personal income tax exemption limits – higher disposable incomes resulting in impetus to overall
demand
§ Effective MAT rate increased from 15% to 18%
§ Increase in Cenvat rate from 8% to 10%
§ Structural changes in excise duty on tobacco products –weighted average increase in excise duty on Cigarettes
at 15-17%
§ Specific increase in excise duty of Sanitary Napkins and Diapers from 0% to 10%

Changes during the year

§ Excise exemptions for units in hilly areas (HP) and backward areas (North East) extended by another 5 years
for units registered and operational before 31st March 2016 (31st March 2011 earlier)

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FMCG (Cont’d…)

Industry Wish List

§ Continued thrust and higher allocations to social and developmental programs – especially MGNREGA
§ No change in Cenvat rate, considering the high inflation and rising input prices
§ No change in excise rate on tobacco products, considering revamp in duty structures and changes implemented
in previous union budget
§ Increase in service tax from 10% to 12%
§ Reduction of MAT rate – currently applicable at 18%
§ Roadmap for FDI in retail sector
§ Roadmap for implementation of DTC and GST

Our Expectations
§ Higher allocations to social and development programs targeted for rural India – like Indira Gandhi Vikas
Yojana, NREGA, Bharat Nirman, Indira Awas Yojana and Krishi Vikas Yojana
§ Cenvat rate to increase from 10% to 12% - full rollback of fiscal stimulus granted in FY09-10
§ Raise Service tax from 10% to 12% - largely to bring rate of goods and services at one level
§ Excise duty on Cigarettes to increase marginally & not significantly – since large increase was implemented in
FY10-11
§ MAT rate would remain unchanged, owing to fiscal management
§ GST would remain hidden agenda in budget – but not at fore

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IT / ITES Services

Last budget
§ Increase in MAT Rate from 15% to 18% of book profits to hurt cash flows , though no impact on earnings
§ Union Budget remained silent on extending STPI Tax benefits available to Indian IT/ITES companies under
Section 10A/10 B of the Income Tax Act’1961 beyond March 31’2011.
§ Anomaly on the effective date for Section 10AA benefits available to SEZ units corrected with the benefits
effective with retrospective effect from April 1’06.

Industry wish list

§ Extension of Tax benefits available to Indian IT/ITES companies beyond the deadline of March 31’2011 as
several mid cap IT companies are lagging behind in terms of expansion through SEZ.

Our expectations
§ We would be positively surprised by extension of Section 10A/10B benefits given Demand for offshore IT
services remain strong.
§ Any increase in Income Tax slabs/ reduction in Tax Rates would be positive as in companies could be able to
reduce effective salary increments on a/c of ‘higher take home salaries’ for employees

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Media

Last budget
§ Concession on custom duty by 5% with full exemption from special additional duty on digital head end
equipment

Industry wish list

§ Relaxation in FDI norms - Increase in FDI limits from currently 49% in DTH and cable, 26% in news
broadcasting & print media and 20% in radio sector
§ Reduction in service tax - Broadcasters are subject to levy of service tax @12.24% unlike print media
companies.

Our expectations
§ We expect relaxation in FDI norms in budget as it also been recommended by TRAI.

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Metals and Mining

Last budget
§ Increase in excise duty from 8% to 10%
§ Increase MAT from 15% to 18%
§ Increase on custom duty on silver by Rs 500/ kg
§ Increase in total infrastructure spend to ~Rs 1730 bn
§ Allocation of captive coal blocks through competitive bidding

Changes during the year

§ Export duty on iron ore lumps hiked to 15% from 10%

Industry wish list

§ Reduction/ removal of 5% import duty on coke/ coking coal
§ Increase of export duty on iron ore fines from 5%
§ Higher infrastructure spending
§ Hike in import duty on HR coil from 5%
§ Regulatory body for competitive bidding in coal block auction

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Metals and Mining (Cont’d…)

Our expectations
§ Duty on coke/ coking coal may be reduced
§ Export duty on iron ore fines is not likely to be hiked
§ We don’t expect hike in import duty on HR coil, in fact looking at inflationary pressure there might be pressure to
remove of import duty on HR coil
§ We don’t expect any further hike in excise duty

Impact on sector
§ Removal/ reduction in coking coal/ coke would be a respite for the steel industry
§ Hike in export duty on iron ore fines would be a dampener for companies like Sesa Goa, no significant impact is
likely on steel industry
§ Some states have been urging the centre to hike royalty rates on minerals, if it happens then that would be a
negative for the mining industry as well as for the user industry due to cost escalation

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Oil & Gas

Last budget
§ Restore the custom duty from NIL to 5% on crude oil
§ 7.5% custom duty on diesel and petrol (from 2.5% earlier) and 10% on other refined products (from 5% earlier)
§ Central excise duty on petrol and diesel enhanced by Re.1/ Litre each.
§ MAT increase from 15% to 18%

Changes during the year

§ Partial implementation of Kirit Parekh Committee’s recommendation: The government has fully deregulated
petrol prices and partial deregulation of diesel prices. However, prices of LPG and SKO has increased by
Rs.35/cyl and Rs.3/ltr respectively.
§ Government has notified section 16 for PNGRB to authorized gas pipelines and the city gas distribution (CGD)
networks.

Industry wish list

§ Tax holiday on City Gas Distribution business
§ Diesel deregulation

Our expectations
§ Reduction in custom and excise duty on crude oil and petroleum products to reduce the total under recovery of
petroleum products – Positives for OMC’s and upstream companies due to reduction in total under recoveries
§ Full deregulation of diesel prices – Positives for the companies like IOCL, BPCL, HPCL, ONGC, OIL, GAIL

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Paper

Last Budget
§ Increase in MAT rate from 15% to 18%
§ Clean energy cess of Rs 50 /mt was levied on imported and indigenous coal
§ Paper continues to enjoy concessional excise duty rates at 4% while custom duty remained unchanged on
paper at 10% and on pulp at 5%

Industry wish list

§ To keep the current excise and custom duty structure - unchanged

Our Expectations
§ We expect paper industry to continue to enjoy concessional excise duty rates at 4%
§ Custom duty rate may also continue at current levels

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Pharma

Last Budget
§ MAT hiked to 18% from 15%
§ Excise duty on API hiked from 8% to 10%
§ Extended weighted average deduction on in-house R&D to 200% from 150%
§ Allocation on Healthcare sector has been increased to Rs 223bn from Rs196bn

Industry Wish list

§ The 5 yr tax holiday for healthcare infrastructure in tier-2 and tier-3 towns should be extended to 10 yrs
§ Concessional rate or removal of duties for certain categories of life saving drugs
§ Increase in allocation on healthcare infrastructure and healthcare sector be given infrastructure status
§ Expenses incurred outside R&D facility like those on overseas trials, preparations of dossiers, consulting & legal
fees, ANDAs should be eligible for weighted deduction
§ Reduction of excise duty on API from 10% to 8%

Our Expectations
§ Concessional rate for certain categories of life saving drugs
§ Tax holidays for healthcare facilities in tier-2 and tier-3 town to be extended to 10 yrs from 5 yrs
§ Expenses incurred outside R&D facility like those on overseas trials, preparations of dossiers, consulting & legal
fees, ANDAs should be eligible for weighted deduction
§ FDI cap likely to be reduced from current 100% to 49%

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Power

Last budget
§ Last budget was negative for private power utilities and neutral for regulated utilities.
§ Coal cess of Rs50/MT imposed impacting private utilities ROE negatively
§ 16% customs duty imposed on electricity supplied from SEZ – Was negative for Adani Power – However the
company currently has gone to GERC to claim the reimbursement of duty as this is a change in law and is pass
through under PPA
§ MAT rate hiked to 18% (from 15% earlier) - negative for private utilities as most of them have SPVs to execute
power projects with no taxable profits currently – meaning thereby that they would be falling under MAT.
§ APDRP and RGGVY outlay to Rs37bn and Rs55bn, up 77% & down 21% over FY09-10 budgetary allocation –
positive for transmission and distribution companies – was positive for T&D Companies.
§ Plan outlay for the Ministry of New and Renewable Energy - Rs6.2bn in FY09-FY10 Increased by 61 per cent to
Rs.10bn in FY10-11.
§ Competitive bidding process for allocating coal blocks for captive mining to ensure greater transparency and
increased participation in production from these blocks was introduced.

Changes during the year – no significant changes have taken place

§ Renewable energy certificate regulations issued with guidelines for its trading.
§ Government issued guidelines for grid-connected solar power projects

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Power (Cont’d…)

Industry wish list

§ Extension of terminal date (31.03.2011 as of now) of tax holidays under section 80 –IA.
§ Increase in allocations to APDRP, RGGVY and new and renewable energy ministry likely to be hiked
significantly from previous budget allocations of Rs37bn, Rs55bn and Rs10bn respectively.
§ Announcement on formation a debt fund that will raise low-cost and long-term resources to re-finance power
projects.
§ Focus on rural electrification/power distribution with greater involvement of private players – incentives,
establishment of a separate fund etc.

Our Expectations
§ There could be an increase in coal cess and also it might be only for private power utilities selling at market
prices and not for cost plus projects.
§ Extension of terminal date (31.03.2011 as of now) of tax holidays under section 80 –IA.
§ Increase in allocations to APDRP, RGGVY and new and renewable energy ministry likely to be hiked
significantly from previous budget allocations of Rs37bn, Rs55bn and Rs10bn respectively.
§ Focus on rural electrification/power distribution with greater involvement of private players – incentives,
establishment of a separate fund etc.
§ Allocations of captive coal blocks – clarity on bidding criteria and royalty amount

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Telecom

Last budget
§ Hike in MAT - Increase in MAT from 15% to 18%
§ Extension of tax sops for mobile manufacturers - Extension of tax sops to mobile manufacturing companies to
encourage manufacturing of mobile handsets in the country.

Industry wish list

§ Re-introduction of the tax holiday benefits under Section 80IA of the I-T Act to operators similar to provision that
exempted operators commencing services prior to 2005
§ Clarity on MAT credit available under Section 115JAA of the I-T Act would continue to be available in case of
merger/acquisition. Providing tax breaks to telecom infrastructure service providers
§ To extend Income Tax benefits under Section 80-IA to Independent Infrastructure Service Providers. Granting
Infrastructure status to Independent Telecom Infrastructure Providers as a separate entry u/s 80-IA(4)
§ No import duty to be imposed on imported mobile handsets

Our expectations
§ We expect relaxation in the taxation norms to telecom service providers and telecom infrastructure companies,
given the capital intensive nature of the sector.
§ The government is expected to impose import duty on imported mobile handsets to encourage the domestic
production.

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Thank You

Emkay Global Financial Services Ltd.

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