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Mar 19, 2012, 01.51 PM IST | Source: Moneycontrol.com

Budget 2012-13: A miss on reforms, but realistic nonetheless by KRChoksey

KRChoksey has come out with its report on Budget 2012-13. Higher fiscal deficit and government borrowings continues to act major macro headwinds.

KRChoksey has come out with its report on budget 2012- 13.

In our budget preview note, we had expected that Finance Minister would announce policy prescription towards acceleration in pace of economic reforms as well as layout clear cut road map for reduction in subsidiaries; however FM has disappointed us on both the fronts. Despite the need of hour, the government has not spell out plans regarding timing of implementation of DTC. Moreover, they missed the opportunity to increase investment thrust by further increasing FDI limit in aviation as well as insurance. Further, the government failed to spell out clearly how they are planning to rein in ballooning subsidies especially in case of fuel bill and fertilizer sector in coming financial year. We believe the lack of credit plan by government to control fiscal deficit will adversely impact timing as well as quantum of rate cut by RBI in the coming 12 months. This in turn will adversely impact investment sentiment in the country as well as overall corporate performance in near term.

Corporate tax rates – No change in corporate tax rate.

Individual tax rates – Exemption limit increased from Rs.1.8 lacs to Rs.2.0 lacs and income slab increased from Rs.8 lacs to Rs.10 lacs for 20% tax bracket.

Indirect Taxes – GST will be implemented from Aug 2012. Excise and services tax have increased from 10% to 12%, migrated from positive to negative list in service tax and increase in peak custom duty.

Sectors with Positive Impact: FMCG, Fertilizer, Infrastructure, Power & Capital Goods

Principal Beneficiaries: IDFC, HDFC, L&T, ITC, Adani Power, IRB Infrastructure, Adani Port, Reliance Infrastructure

Inclusive growth is mantra for sustainability of growth:

  • Private consumption has been the engine of Indian economic growth, unlike China which is driven by exports
  • Allocation under Bharat Nirman and social spending increased 20% to Rs.58,000 crore.
  • Allocation for PMGSY increased by 20% to Rs24,000 crore to improve connectivity.
  • Allocation for rural drinking water and sanitation increased by 27% to Rs14,000 crore
  • Target for agricultural credit raised by Rs 1,00,000 crore to Rs5,75,000 crore in FY12-13.
  • Allocation for education increased by 21.7% over current year
Sharper focus on infrastructure:

  • During Twelfth Plan period, investment in infrastructure to go up to Rs50 lakh crore with half of this, expected from private sector.
  • More sectors added as eligible sectors for Viability Gap Funding under the scheme “Support to PPP in infrastructure”.
  • Tax free bonds of Rs.60,000 crore to be allowed for financing infrastructure projects in 2012-13.
  • IIFCL has put in place a structure for credit enhancement and take-out finance for easing access of credit to infrastructure projects.
  • Government has approved guidelines for establishing joint venture companies by defence PSUs in PPP mode.
  • Direct tax and indirect tax reforms are getting momentum
  • STT reduced by 20% to 0.10% on delivery transaction – positive for financial service companies
  • Corporate tax rate stable while hike in individual exemption limits – positive for consumption story
  • Government to move towards direct transfer of cash subsidy to people living below poverty line in a phased manner for better delivery of kerosene, LPG and fertilizers. Pilot projects are operating in small locations and gradually the Government may introduce direct cash transfer for subsidy system.
Key negatives:

  • Higher fiscal deficit and government borrowings continues to act major macro headwinds.
  • Tax on sale of foreign shareholding with retrospective effect would damage FDI and confidence of global investors – Vodafone case runs the threat of being reopened.
  • Increase in crude oil cess to Rs4500 per tone affects adversely EPS of Cairn India by Rs5 & ONGC by Rs2.5.
  • MAT @ 18.5% will bring many companies in tax net and increase tax liability for companies like Sun Pharma and Cadila.
Direct Tax- stable rates:

  • No change in corporate tax rate
  • Extend the levy of Alternate Minimum Tax increased to all persons, other than companies claiming profit linked deductions.
  • Individual exemption limit enhanced from Rs.1.8 lacs to Rs.2.0 lacs and change in upper limit of income slab for 20% tax bracket increased from Rs. 8.0 lacs to Rs.10 lacs.
  • Moreover, interest from saving bank accounts is exempted upto Rs.10,000. Further, Rajiv Gandhi Equity Savings Scheme is introduced which provides for 50% deduction on Rs. 50,000 investment in said schemes by new retail investors having earning upto Rs.10 lacs.
  • Exemption from Capital Gains tax on sale of residential property, if sale consideration is used for subscription in equity of a manufacturing SME for purchase of new plant and machinery.
  • Proposal to extend weighted deduction of 200 per cent for R&D expenditure in an inhouse facility for a further period of 5 years beyond March 31, 2012.
Non-Institutions holding more than 90% in Indian cos

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