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Mar 03, 2011, 04.42 PM IST | Source: Moneycontrol.com

Analysis of budget 2011-2012: D&B

Dun & Bradstreet (D&B) has come out with its report on Union Budget 2011-12.

Analysis of budget 2011-2012: D&B
Dun & Bradstreet (D&B) has come out with its report on Union Budget 2011-12.

Union Budget 2011-12:


The Union Budget FY12 has been presented at a time when the Indian economy is heading towards a high growth trajectory, albeit certain challenges such as elevated inflation, high Current Account Deficit (CAD), and moderating growth of industrial production, which have surfaced in the recent past. At the current juncture, what was required from the Budget was to address the issue of inflation and support growth momentum, while maintaining the focus on fiscal consolidation and continuing ahead on the reform agenda. Increased allocation of planned resources towards infrastructure projects along with the proposals to direct foreign funds and private saving towards infrastructure sector will unlock much of the growth potential of the sector.

Although the continued thrust on infrastructure along with agriculture and education sectors is expected to provide significant impetus to economic growth in the medium-term, measures to control inflation in the immediate future were missing in the budget announcements. Having said that, the emphasis on addressing structural concerns such as weak supply chain linkages, and shortcomings in distribution and marketing systems of agriculture commodities is expected to provide long term solution to these issues, which have been contributing to high inflation in the past. Nonetheless, effective and timely implementation of proposed initiatives remains the key to tackle these long pending issues in the agricultural supply chain.

Even as the Budget FY12 reinforces the need for continuation of the reform agenda, it lacks major announcements on this front. While the emphasis of the budget on active consideration of a new fertiliser policy for urea, direct transfer of cash subsidy to BPL people for better delivery of kerosene, LPG and fertiliser, further liberalisation of the FDI policy, et al is definitely positive, how these proposals fare on the implementation front remains to be seen. Rescheduling the implementation of Direct Tax Code (DTC) and Goods and Service Tax (GST) by April 2012 does spell out some concerns on the governance front, but were much anticipated. The decision to propose the revised Companies Bill in the current parliamentary session and intention to introduce the National Food Security Bill (NFSB) during the course of this year are indeed welcome.

On the fiscal deficit front, the budgeted fiscal deficit of 4.6% for FY12, below the Finance Commission’s target of 4.8% for the same year reiterates the Government’s commitment on the fiscal consolidation. This augurs well for India’s growth prospects, given that it enlarges the resource space for private enterprises.

Fiscal Arithmetic for FY12:

For FY12, total expenditure is budgeted to increase by 3.38% to Rs 12,577.29 bn as compared to the revised estimates (RE) of Rs 12,165.76 bn for FY11. As in the last budget, the Plan expenditure received a major boost with an allocation of Rs 4,415.47 bn, an increase of 11.78% over the FY11 RE. The non-plan expenditure, however, is budgeted to register a marginal decline compared to the revised estimates of FY11; the expenditure on this front is slated to decline by 0.65%. The subsidy burden is budgeted to decline by 12.54% during FY12 over FY11 (RE), owing to relatively lower budgeted fertiliser & petroleum subsidy burden and decline in budgeted payments to lending institutions against debt waiver and debt relief scheme for farmers. It is important to note here that if the international crude oil prices continue to rise unabated, the strain on petroleum subsidy might increase.
 
The expectations regarding the economy moving back to the high growth trajectory of pre-crisis period seem to have guided the revenue target for FY12. Gross tax revenue for FY12 is budgeted to increase by 17.88% over the FY11 RE, driven by a 19.42% increase in direct tax revenue coupled with 17.36% increase in revenue from indirect taxes. On the direct tax front, improvement in corporate profitability along with marginal increase in the rate of minimum alternate tax (MAT) to 18.5% from 18% is expected to garner higher revenues from the corporate sector; revenue from corporate tax is budgeted to increase by 21.46%. Despite the broadening of the income tax slabs, the personal income tax collection is budgeted to increase by 15.40% in FY12 over the FY11 RE. Within indirect taxes, revenue from customs and excise duty is budgeted to increase by 15.10% and 19.12% respectively. The widening of the service tax gamut to include new services is expected to augment service tax revenue, which is budgeted to increase by around 18.16% over the FY11 RE.

Non-tax revenue, on the other hand, is budgeted to record a significant decline of 43.02% during FY12 compared to the RE of FY11. This decline is primarily due to substantially higher non-tax revenue collections during FY11 backed by one-time revenue gain from the 3G spectrum auction. Disinvestment proceeds, however, will play a role in augmenting revenue collections; proceeds from ‘disinvestment of equity in public sector enterprises’ is budgeted to increase to Rs 400 bn in FY12 from Rs 221.44 bn in FY11 RE. Further, market borrowings are slated to come down by around 6.68% and be around Rs 4,171.28 bn during FY12 as compared to Rs 4,470.00 bn in FY11 RE.

However, in the current scenario, fiscal deficit target though encouraging seems highly ambitious. Continuing its focus on the fiscal consolidation, the Budget has set the rolling targets at 4.1% and 3.5% for FY13 and FY14 respectively. Moreover, the decision to introduce an amendment to the FRBM Act, laying down the fiscal road map for the next five years during the course of the year reiterates Government’s commitment towards fiscal prudence in the years to come.

Agriculture:

  • The total plan outlay for agriculture & allied sector is to be increased by 19.79% to Rs 147.44 bn.
  • The target agricultural credit is proposed to be raised to Rs 4,750 bn in FY12 from Rs 3,750 bn in FY11.
  • The Government raised the corpus of RIDF (Rural Infrastructure Development Fund) XVII to Rs 180 bn in FY12 from Rs 160 bn in FY11 wherein the additional allocation would be dedicated to creation of warehousing facilities.
  • Interest subvention proposed to be enhanced from 2% to 3% for providing short-term crop loans to farmers who repay their crop loan on time.
  • In view of enhanced target for flow of agriculture credit, capital base of NABARD to be strengthened by Rs 30 bn in a phased manner.
  • Rs 100 bn to be contributed to NABARD’s Short-term Rural Credit fund for FY12.
  • An allocation under Rashtriya Krishi Vikas Yojana (RKVY) increased to Rs 78.60 bn in FY12 from Rs 67.55 bn in FY11.
  • An allocation of Rs 17 bn for National Horticulture Mission including Rs 5 bn for north east and Himalayan states.
  • An allocation of Rs 13.50 bn for National Food Security Mission.
  • An allocation of Rs 7.80 bn for Macro Management in Agriculture.
  • An allocation of Rs 11.50 bn for National Mission on Micro Irrigation.
  • An allocation of Rs 7 bn for National Agricultural Insurance Scheme including Rs 1.50 bn for Modified national Agriculture insurance scheme.
  • An allocation of Rs 5.50 bn for integrated oilseeds, oil palms, pulses and maize development.
  • Removal of production and distribution bottlenecks for items like fruits and vegetables, milk, meat, poultry and fish to be the focus of attention this year.
  • To improve rice based cropping system in the eastern region, an allocation of Rs 4 bn has been made.
  • An allocation of Rs 3 bn made to promote 60,000 pulses villages in rainfed areas.
  • An allocation of Rs 3 bn to bring 60,000 hectares under oil palm plantations - an initiative to yield about 3 lakh metric tonnes of palm oil annually in five years.
  • As an initiative on vegetable clusters, an allocation of Rs 3 bn made for implementation of vegetable initiative to provide quality vegetable at competitive prices.
  • An allocation of Rs 3 bn provided to promote higher production of Bajra, Jowar, Ragi and other millets, which are highly nutritious and have several medicinal properties.
  • An allocation of Rs 3 bn provided for Accelerated Fodder Development Programme to benefit farmers in 25,000 villages.
  • The Government to promote organic farming methods, combining modern technology with traditional farming practices.
  • An approval being given to set up 15 more Mega Food Parks during FY12.
  • Augmentation of storage capacity through private entrepreneurs and warehousing corporations has been fast tracked.
  • Capital investment in creation of modern storage capacity will be eligible for viability gap funding of the Finance Ministry. It is also proposed to recognize cold chains and post-harvest storage as an
    infrastructure sub-sector.
  • In view of recent episode of inflation, need for State Governments to review and enforce a reformed Agriculture Produce Marketing Act been recognised.
  • National Food Security Bill (NFSB) which will be introduced in the Parliament during the course of the current year.
  • Extended full exemption from excise duty to air-conditioning equipment and refrigeration panels for cold chain infrastructure.
  • Include conveyor belts in the full exemption from excise duty to equipments used in cold storages, mandis and warehouses.
  • Basic customs duty reduced for specified agricultural machinery to 2.50% from 5% and the concession is also being extended to parts of such machinery to encourage their domestic production.
  • Basic customs duty reduced on micro-irrigation equipment to 5% from 7.50%.
  • De-oiled rice bran cake fully exempted from basic customs duty. Simultaneously, an export duty of 10% to be levied on its export.
Positive+:

The slew of measures announced for the agricultural sector highlights the Government’s thrust to facilitate storage and reduce the production and supply chain bottlenecks in the agricultural sector which played an important role in driving inflation in the economy. While establishing an efficient supply chain and removal of production and distribution bottlenecks, especially for food items which has led to inflation has received the Government’s focus during the budget, timely and effective implementation of the initiatives would not only help in reducing the price difference between the whole sale and the retail prices but also provide for better realisation of prices by the farmers. It would also help in combating supply side driven food inflation in the medium to long term. Moreover, if the Agriculture Produce Marketing Act is reformed as highlighted in the budget it would lead to further improvement in the supply chain linkages in the agricultural sector.

In the budget the Government further enhanced its thrust to improve the storage facilities in the agriculture sector by allocating funds for creation of warehousing facilities. Facilitating for further private sector participation will ensure reduction in wastage of farm output, thereby enhancing greater food security going ahead. Moreover, in this budget there has been announcement of new initiatives such as accelerated Fodder Development Programme which bodes well for the sector.

While the Union budget for FY12 witnessed significant plan allocation, the Government also placed due emphasis on resolving the supply chain blockages in the agricultural sector which required serious attention besides, considerably stepping up the credit flow. It was also commendable that the Government placed emphasis on speedy implementation on various schemes under the RKVY and also recommended that the storage capacity through private entrepreneurs and warehousing corporations to be fast tracked.

Fertiliser:

  • Capital investment in fertiliser production proposed to be included as an infrastructure subsector.
  • Government actively considering extension of the Nutrient Based Subsidy (NBS) regime to cover urea.
  • To ensure greater efficiency, cost effectiveness and better delivery for fertilisers, the Government will move towards direct transfer of cash subsidy to people living below poverty line in a phased manner.
  • Extension of benefit of investment linked deduction to businesses engaged in the production of fertilisers.
Positive+:

The overall outlook on the fertiliser sector remains positive. The major move in the sector which will drive investment is by including capital investment in fertiliser production as an infrastructure sub sector which will help to mitigate the risk of investing. Moreover, extending the benefits of investment linked deduction to businesses engaged in the production of fertilisers will increase
the flow of capital in the sector. The government’s intention to move to a NBS of fertilisers not only bodes well for the industry but also promotes balanced use of fertiliser and would further link transparently the prices and subsidies to the composition of a product. Further, the proposed system of direct transfer of subsidy for fertilisers is seen as a good move as the domestic industry
has long suffered from under recovery of cost and delay in disbursement of subsidy.

Social Sector:

The social sector expenditure is proposed to be increased to Rs 1,608.87 bn during FY12 an increase of 17% over the previous year. It amounts to 36.40% of the total plan allocation.

Human Resource Development and Social Justice:

  • An allocation of Rs 103.30 bn for Integrated Child Development Services.
  • An allocation made for Mahatma Gandhi National Rural Employment Guarantee Scheme amounting to Rs 400 bn in FY12 as compared to Rs 401 bn in FY11.
  • An allocation of Rs 29.14 bn under the ‘Swaranjayanti Gram Swarozgar Yojana’ (SGSY) for establishing micro-enterprises in rural areas. At least 50% of the Swarozgaries will be SCs/STs, 40% women and 3% disabled. It has been decided to restructure SGSY into National Rural
    Livelihood Mission (NRLM).
  • To create in the course of the year “India Microfinance Equity Fund” with a corpus of Rs 1 bn with SIDBI. Government considering putting in place appropriate regulatory framework to protect the interest of small borrowers.
  • To empower women and promote their Self Help Groups (SHGs) creation of a “Women’s SHG’s Development Fund” with a corpus of Rs 5 bn.
  • Relaxation of exit norms under the pension scheme “Swavalamban” whereby a subscriber under Swavalamban will be allowed to exit at the age of 50 years instead of 60 years or a minimum tenure of 20 years whichever is later. Moreover, proposal to extend the benefit of
    Government contribution from three to five years for all subscribers of Swavalamban who enroll during FY11 and FY12.
  • Under the on-going Indira Gandhi National Old Age Pension Scheme for BPL beneficiaries, the eligibility for pension is proposed to be reduced from 65 years at present to 60 years. Further, for those who are 80 years and above, the pension amount is being raised from Rs 200 at present to Rs 500 per month.
  • Existing scheme of interest subvention of 1% on housing loan further liberalised.
  • An allocation of Rs 5.20 bn for Indira Gandhi Matritva Sahyog Yojana.
  • The plan outlay for Women and Child Development is proposed to be increased to Rs 126.50 bn in FY12 from Rs 110 bn in FY11.
  • An allocation of Rs 7.50 bn for Rajiv Gandhi Scheme for Empowerment of Adolescent Girls.
  • The plan outlay of the Ministry of Social Justice and Empowerment is proposed to be enhanced to Rs 53.75 bn in FY12, marking an increase of 19.40% as compared to FY11.
  • The plan allocation for the Ministry of Minority Affairs is proposed to be increased to Rs 28.50 bn for FY12 from Rs 26 bn in FY11.
  • Increase the budget allocation for primitive tribal groups to Rs 2.44 bn in FY12 from Rs 1.85 bn in FY11.
  • For the first time, specific allocations are being earmarked towards Scheduled Castes Subplan and Tribal Sub-plan.
Education:

  • An allocation of Rs 520.57 bn in FY12 for education, which is an increase of 24% over FY11.
  • The proposal to increase the plan allocation for school education to Rs 389.57 bn in FY12 from Rs 310.36 bn in FY11.
  • An allocation of Rs 210 bn for Sarva Shiksha Abhiyan which is 40% higher than Rs 150 bn allocated in FY11. A revised Centrally Sponsored Scheme “Vocationalisation of Secondary Education”
    will be implemented from FY12 to improve the employability of the youth.
  • An allocation of Rs 103.80 bn for National Programme of Mid Day Meals in schools.
  • An allocation of Rs 52.54 bn for University Grants Commission; Rs 56.60 bn for technical education and Rs 9.43 bn for National Mission in Education through information & communication technology.
  • Connectivity to all 1,500 institutions of Higher Learning and Research through optical fiber backbone to be provided by March, 2012.
  • Additional Rs 5 bn proposed to be provided for National Skill Development Fund during FY12.
  • Introduce a scholarship scheme in FY12 for needy students belonging to the Scheduled Castes and Scheduled Tribes studying in classes ninth and tenth which would benefit about 40 lakh Scheduled Caste and Scheduled Tribe students.
  • Rs 500 mn each to upcoming centres of Aligarh Muslim University at Murshidabad in West Bengal and Malappuram in Kerala.
  • Rs 1 bn as one-time grant to the Kerala Veterinary and Animal Sciences University at Pookode, Kerala.
  • Rs 100 mn each for setting up Kolkata and Allahabad Centres of Mahatma Gandhi Antarrashtriya Hindi Vishwavidyalaya, Wardha.
  • Rs 2 bn as one time grant to IIT, Kharagpur.
  • Rs 200 mn for Rajiv Gandhi National Institute of Youth Development, Sriperumbudur, Tamil Nadu.
  • Rs 200 mn for IIM, Kolkata, to set up its Financial Research and Trading Laboratory.
  • Rs 2 bn for Maulana Azad Education Foundation.
  • Rs 100 mn for Centre for Development Economics and Ratan Tata Library, Delhi School of Economics, Delhi and Rs 100 mn for Madras School of Economics.
Health & Sanitation:

  • The plan allocation for the Ministry of Health and Family Welfare is proposed to be increased to Rs 267.60 bn in FY12 from Rs 223 bn for FY11.
  • An allocation of Rs 178.40 bn for National Rural Health Mission.
  • The Rashtriya Swasthya Bima Yojana extended to cover unorganised sector workers in hazardous mining and associated industries like slate and slate pencil, dolomite, mica and asbestos etc.
  • An allocation of Rs 93.50 bn for National Rural Drinking Water Programme.
  • An allocation of Rs 16.50 bn for rural sanitation
Regional Development:

  • In order to boost development in the North Eastern Region and Special Category States, the allocation for special assistance almost doubled to Rs 80 bn for FY12 as compared to FY11. Out of this, Rs 54 bn allocated as untied Special Central Assistance.
  • To give a boost to the development of backward regions, the allocation under the Backward Regions Grant Fund increased to Rs 98.90 bn in FY12 from Rs 73 bn in FY11, an increase of over 35%.
  • The Government’s special support to Jammu & Kashmir is anchored in Rs 280 bn Prime Minister’s Reconstruction Plan. In addition, for the current year, about Rs 80 bn has been provided for the State’s development needs.
  • Allocation made in FY12 to meet the infrastructure needs for Ladakh (Rs 1 bn) and Jammu region (Rs 1 bn).
  • Funds allocated under Integrated Action Plan (IAP) for addressing problems related to Left Wing extremism affected districts. 60 selected Tribal and backward districts provided with 100% block grant of Rs 250 mn and Rs 300 mn per district during FY11 and FY12 respectively.
Positive+:
By allocating 36.40% of the total plan outlay for the social sector during FY12, the Government has reiterated its emphasis for the upliftment of the weaker sections of the country. In order to enhance financial inclusion, a dedicated fund with a corpus of Rs 1 bn have been created for smaller MFIs besides, forming a Women’s Self Help Group’s Development Fund which would enhance the empowerment of women.

The Government has extended its thrust towards the development of education in the budget by enhancing the plan allocation by 24% over the previous budget. Emphasis has also been laid on developing vocational education to improve the employability of the youth in addition to making
provision for National Skill Development Fund. The Government has also made special allocation for boosting higher education in the country.

While the senior citizens (BPL beneficiaries) have been given a special attention under the pension schemes, the Rashtriya Swasthya Bima Yojana has been extended to cover unorganised sector workers in hazardous mining and associated industries. The Government has also paid due attention for further development of the backward regions, allocating funds for the infrastructure needs for Ladakh and Kashmir besides directing funds for addressing problems related to Left Wing extremism affected districts. Moreover, for the first time, specific allocations have been earmarked towards Scheduled Castes Sub-plan and Tribal Sub-plan. Besides, the Government’s
focus on drinking water, health and sanitation is another positive aspect for the social sector in this budget.

Infrastructure:

  • An allocation of Rs 2,140 bn for infrastructure sector accounting for 48.50% of planned expenditure.
  • Capital investment in Fertiliser production to be classified as an infrastructure sub-sector.
  • Designing of a comprehensive policy that can be used by the Centre and the State Governments in further developing public-private partnerships under the National Capacity Building
    Programme.
  • Target for cumulative disbursement by India Infrastructure Finance Company Limited (IIFCL) raised to Rs 250 bn by March 31, 2012.
  • Additional deduction of Rs 20,000 for investment in long-term infrastructure bonds to be continued in FY12.
  • Permit to issue tax free bonds of Rs 300 bn by various Government undertakings including Rs 100 bn by Indian Railway Finance Corporation (IRFC), Rs 100 bn by National Highway Authority
    of India (NHAI), Rs 50 bn by Housing and Urban Development Corporation Limited (HUDCO) and Rs 50 bn by Ports in FY12.
  • FII limit for investment in corporate bonds, with residual maturity of over five years issued by companies in infrastructure sector, raised by an additional limit of US$ 20 bn taking the total limit to US$ 25 bn.
  • Permit for FIIs to invest in unlisted bonds with a minimum lock-in period of three years with permission to trade amongst themselves during the lock-in period.
  • Creation of special vehicles in the form • of notified infrastructure debt funds to attract foreign funds for the infrastructure financing. Interest payment on the borrowings of these funds to be subject to a withholding tax rate of 5% instead of the current rate of 20%. The income on the fund would be exempt from tax.
  • Levy of Minimum Alternate Tax (MAT) on developers of Special Economic Zones (SEZs) and units operating in SEZs.
  • Reduction in tax on dividend received by an Indian company from its foreign subsidiary to 15%.
  • Ready mix concrete (RMC) to attract excise duty of 5%. The same would attract a concessional rate of 1% without CENVAT credit.
Roads and Highways:

  • Allocation of Rs 103.40 bn for National Highways Development Programmes (NHDP).
  • Full exemption from basic customs duty for bio-asphalt and specified machinery (including tunnel-boring machines) for application in the construction of national highways.
Urban Infrastructure:

  • Allocation under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) of Rs 125.20 bn for FY12 as against Rs 116.20 bn in FY11.
  • Allocation of Rs 15.60 bn for FY12 towards equity investments for all Metro Rail Projects.
  • Proposal to take up the Delhi Metro Phase-III and the Mumbai Metro Line III in FY12.
  • Financial assistance for ongoing Metro projects of Bengaluru, Kolkata and Chennai for speedy implementation.
Rural Infrastructure:

  • Total allocation under Bharat Nirman raised by Rs 100 bn to Rs 580 bn for FY12.
  • Allocation of Rs 200 bn under Pradhan Mantri Gram Sadak Yojana (PMGSY) for FY12 as against Rs 120 bn in FY11.
  • Creation of Mortgage Risk Guarantee Fund under Rajiv Awas Yojana (RAY) to guarantee housing loans taken by EWS and LIG households and enhance their credit worthiness.
  • Enhancement of provisions under Rural Housing Fund to Rs 30 bn from existing Rs 20 bn.
  • Backward Regions Grant Fund has been increased from Rs 73 bn to Rs 98.90 bn amounting to an increase of over 35%.
Positive+:

The plan expenditure for infrastructure sector to constitute around 48.50% of total plan outlay for FY12 – a growth of 23.03% over the Union Budget 2010-11, indicating an increased thrust on the sector. Over 11% rise in budgetary allocation on road transport & highways is expected to encourage the transportation and logistics sector in India.

To boost non-banking financial avenues for infrastructure companies, the Budget provides thrust through various financing schemes. Since most of the infrastructure companies are organised in the form of SPVs, FIIs would also now be permitted to invest in unlisted bonds with a lock-in of three years. A rise in the cap of FII investment in corporate bonds with residual maturity of
five years, issued by infrastructure companies, to US$ 25 bn from US$ 20 bn would also provide impetus to the infrastructure development. Additionally, allowing for tax free bonds to the tune of Rs 300 bn by various Government undertakings including IRFC, NHAI, HUDCO and Ports would further support infrastructure financing.

Reduction in taxation on foreign dividend, of Indian companies to help infrastructure companies repatriate money back in the country. However, MAT on SEZ developers to be a negative.

Given the increased plan outlay corroborated with facilitation through increased financing avenues for infrastructure sector, we rate the budget to be significantly positive for the sector.

Hospitality:

  • It is proposed that the hotel accommodation in excess of Rs 1,000 per day with an abatement of 50% so that the effective burden is 5% of the amount charged for levying Service Tax.
  • It is proposed that the services provided by air conditioned restaurants, that have license to serve liquor giving an abatement of 70% will have an effective burden of 3% of the bill.
  • It is proposed to increase the service tax on air travel both domestic and international by Rs 50 and Rs 250 respectively on travel by economy class. The tax travel by higher classes on domestic sector will be charged at 10%.
  • Standard rate of service tax retained at 10%, while seeking a closer fit between present regime and its GST successor.
Negative:

The introduction of service tax on hotels, air conditioned restaurants as well as increasing the same on air travel is a negative for the overall hospitality sector. With the introduction of 5% and 3% effective burden on hotels accommodation and air conditioned restaurants serving liquor respectively, billing amount to the customers will increase thereby impacting the overall business in the hotel industry. Further, rise in service tax on domestic as well as international air travel and introduction of 10% tax in the domestic higher class travel will increase the overall cost of air travel putting a negative impact on the aviation sector. The overall outlook on Indian hospitality sector remains negative as it will witness a decline in demand due to the increase in service tax which will make the services in the sector comparatively less affordable to the end user.

IT & ITeS:

  • Minimum Alternative Tax (MAT) to be levied on units operating in Special Economic Zones (SEZ).
  • MAT rates to be hiked from 18% to 18.50% while surcharge is reduced from 7.50% to 5%.
  • Excise duty on parts of ink jet and laser jet printers reduced from 10% to 5%.
  • Excise duty of 5% has been imposed on specified IT products such as microprocessor other than motherboards, floppy disc drives, CD-Rom drive.
  • Full exemption is provided for components of computer connectivity cable imported for its manufacture.
  • Full exemption on payment of additional duty of customs on packaged/canned software.
Negative:

The Government has announced in the budget to levy MAT on companies which are operating in SEZs from FY12. It is expected to significantly impact IT companies which had exemptions from MAT under the SEZ scheme. The budget also makes no mention of the extension of the sunset clause under the Software Technology Park of India (STPI) Act, related to deduction in respect of export profits beyond FY11. The levying of MAT and non-extension of STPI Act beyond FY11 is expected to negatively impact the IT sector as profit margins of IT companies (especially small and medium) who enjoyed tax exemptions under the above mentioned schemes is expected to come down. The non-STPI based IT companies and those IT companies which are not operating from SEZ are not expected to be impacted by this budget. Overall, the additional tax burden is expected to have a negative impact on the IT & ITeS sector.

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