Emkay Global Financial Services has come out with its report on Budget review 2012- 13.
First impression of pro-growth and consolidation:
The combination of 13.1% growth in expenditure (vs our expectation of 10%) at Rs 14.9tn and a robust tax revenue growth 19.5%, afforded by the 200bp increase in excise duty/service tax to 12% and measures to increase service tax collections, gives an impression of fiscal consolidation in Union Budget for FY13. The fiscal deficit target for FY13 at Rs 5.1tn or 5.1% of GDP is a decline from 5.9% in FY12.
In addition the higher allocation under capital account at 30% yoy also gives a first impression of a investment and growth oriented budget.
Key Budget Projections:
Fiscal deficit of Rs 5.1tn or 5.1% of GDP, vs our estimate of Rs 5.4tn or 5.4% of GDP
Gross and net tax revenues for FY13BE to grow at 19.5% and 20.5% respectively
Expenditure Budget estimated to grow by 13.1% (vs our estimate of 10%) at Rs 14.9tn
Net government borrowings pegged at Rs4.79tn vs our estimate of Rs5.0tn
But fails to convince in reality
Higher than expected expenditure budget, intent for fiscal consolidation should have reflected in meaningful cuts in non-plan expenditure
Understatement of fuel subsidy; In Rs436bn provided as petroleum subsidy for FY13BE, we believe about Rs400bn is spill over of FY12. In addition, the budget is silent on fuel price hikes
Optimistic assumption for gross tax collections, non-tax revenue and disinvestment targets
Growth of 19.5% in gross tax collections is a steep target (looking at the weakening industrial production) even after taking into account 200bp increase in the excise duty and service tax
Non-tax revenue receipts are estimated at Rs1.6tn, including ~Rs420bn from the 2G license re-auctions. We are uncertain about the receipt of same in FY13 given multiple legal hurdles that could delay the auction.
Divestment targets set at Rs300bn could also be at risk given that in FY12RE the mobilization was far less than initial Rs400bn target
Fuel subsidies – UNDER PROVISION CONTINUES:
We believe that the fuel subsidy bill for FY13BE at Rs436bn may significantly fall short of the requirement
For M9FY12 government has given a total support of Rs450bn to OMCs. Total under recovery for FY12 is expected to be Rs1400bn of which the government’s share is estimated at Rs850bn (62% of the total)
Of the budgeted Rs436bn as petroleum subsidy for FY13BE, we believe about Rs400bn is spill over of FY12 thus leaving only Rs36bn to cover the under recoveries of FY13
At the current global crude oil and fuel product prices, the total under recoveries for FY13 is expected to be about Rs1700bn. We see limited scope for government to put any burden on oil marketing companies given their weak financial position or put additional burden on upstream companies
Failure by the government to initiate the price hikes in the fuel prices will seriously challenge the credibility of the budget estimates on the expenditure side and fiscal deficit numbers
Direct Tax Proposals:
Direct tax proposals – Corporate
No change in corporate tax rate and MAT rate
Sec 80-IA – extended by one year till March 31, 2013
Additional depreciation of 20% on new acquired assets extended to power generation companies w.e.f. Apr 1,2013
Rate of withholding tax reduced from 20% to 5% on ECB for sectors such as power, airlines, roads & bridges, ports & shipyards, affordable housing, fertilizers and dams for a time period of three years
Reduction in STT by 20% (from 0.125% to 0.1%) on all cash delivery transactions
Extension of 15% marginal tax rate on dividends received by an Indian company from its foreign subsidiary for FY13
Levy of Alternate Minimum Tax (AMT) on all persons other than companies and individuals, claiming profit linked deductions
Weighted deduction of 200% for R&D expenditure for in-house facility extended for a further period of 5 years
Weighted deduction of 150% on expenditure incurred for agri - related services
Investment linked deduction of capital expenditure incurred in cold chain facility, warehouses for storage of food grains, hospitals, fertilizers, affordable housing increased from 100% to 150%
TDS on transfer of immoveable property (other than agricultural land) above a specified limit
Direct tax proposals – Individual/Small Businesses:
Basic exemption limit for the general category of individual taxpayers enhanced from Rs 180,000 to Rs 200,000 giving uniform tax relief of Rs.2,060 & at the upper end (20% bracket) increased the tax slab from Rs.800,000 to Rs. 1,000,000 giving a tax relief of Rs. 20,600.
Rs 20,000 infrastructure investment linked deduction under Sec 80CCF not extended
Deduction of Rs.10,000 on interest income from Savings bank account for assesses with Salary income upto Rs5,00,000
Deduction of Rs.5,000 on amount spent for preventive health check ups, within the existing limit for health insurance.
Introduction of Rajiv Gandhi Equity Savings Scheme with lock in of 3 years. Allows deduction of 50% to new retail investors who invest up to Rs.50,000 directly in equities & whose annual income is below Rs. 1,000,000.
Exemption from capital gains tax on sale of residential property, if the sale proceeds are used for subscription in equity of a manufacturing SME for purchase of new plant & machinery