Union Budget 2009: Great Expectations

Anil Satpathy and Abhishek “A budget is just a method of worrying before you spend money, as well as afterward.” - Anonymous Since 1991, out of 18 budgets so far presented in the Parliament, 14 have caused a downturn in the Sensex for above a month – costing crores of rupees to the investors. No doubt the stock markets do not denote the economy of the country as a whole but nonetheless are an indicator of the expectations of the industry/investors at large. At the same time the Finance Minister would have to deliver ‘inclusive growth’, something promised by the Congress government. Given this, the veteran Congress leader Pranab Mukherjee has his task cut out. Innumerable questions keep on knocking on our minds about what the Finance Minister has in mind. Will he cut taxes; will goods become any cheaper, would infrastructural development be given a fillip? We try to find answer to these and many more questions here: The Manmohan Singh government, after the initial hint of the economy being on a revival path, may take some reformist steps. Industry is keeping its fingers crossed on expectations of tax cuts and a even a fourth stimulus package.Smooth road for auto sector? Both the industry and the consumer have their eyes fixed on the Finmin on this. Any reduction in the taxes/duty structure will boost demand for automobiles. Almost all the auto makers, two-wheeler makers reported double digit growth in recent months irrespective of the situation abroad due to the slowdown. The underlining reason primarily is the vast rural and urban population and their needs. Indian market is still far from getting saturated. But concerns remain as auto loans are still considered highly prone to default. With the liquidity crunch still far from over, cheaper and easier loans are necessary to provide liquidity and to boost sales. Industry players have been asking for interest rate cuts to increase demand, reduction of excise duty differential, which is 8 percent for small cars and 20 percent for all other categories, and scrapping of Central Sales Tax. What the Government can do: The excise duty cut, from 10 percent to 8 percent, may be extended, which will further boost the ailing sector. Though most of firms have reported good sale numbers in recent times in terms of two wheelers, the commercial vehicle segment is still to feel the impact of the duty cut. Four percent excise cut announced earlier in the stimulus package in December will continue beyond March 31, Finance Minister Pranab Mukherjee had said while winding up the debate on the Interim Budget. Mukherjee may further extend this. With direct taxes collection coming down, the government will likely to shy away from further excise duty cut. Great expectations: The government can go for incentivising customers to scrap old vehicles, in line with policies followed in Germany. This will not only boost the auto market, but will also set the stage for greener technologies. The government could also provide incentive in the form of tax relief for developing green technologies. Cement Sector: In the interim budget in February, Mukherjee said that duty on bulk cement had been reduced from 10 percent to 8 percent. The domestic cement industry has, in fact, has further demanded a 50% subsidy on freight on the logistics cost for cement and clinker for exports in the upcoming budget in July. The industry also wants to bring cement in line with steel in terms of value added tax. While VAT on steel is only 4%, it is 12.5% on cement and clinker. The industry, which has grown by an average of 9.7% in the last 3 quarters, is expected to add around 45 million tonnes of fresh capacity in 2009-10, taking the overall capacity to over 260 million tonnes per annum. Currently, there are three sets of duties on cement. In case of retail, sale price not exceeding INR 190 a bag of 50 kilogram, the excise being levied is INR 230 per tonne. For cement being sold at more than INR 190 in the retail market, an excise of 8% on the sale price is levied. For institutional sale, 8% of sale price or INR 230 per tonne, whichever is higher, is levied. Construction Sector: Budget 2009 is expected to be largely positive for the construction sector due to the government’s increased thrust on infrastructure. UPA’s renewed vow to improve the urban/rural infra, roads, has indeed been good news for the sector. Plus the recession has made it compulsory to revive growth momentum. The government would likely hike income-tax exemption available for interest payment on home loans to Rs 2.5 lakh a year to boost demand and turn around the slowdown-hit housing industry. The proposed infusion of additional Rs 4,000 crore for implementing the Jawaharlal Nehru Urban Renewal Mission would be a boost for the sector. Reduction in home loans or reduction in cement prices will provide additional stimulus. Real estate Sector: With Indian economic growth rate stuttering at 6.7 per cent in the fiscal year 2008-09, lowest in last six years, voices are being heard from the Industrial bodies and India Inc for giving more importance on the core sectors of the economy like the infrastructure sector. Major companies like Unitech, DLF and BPTP are struggling. The sector has been cash-trapped amid economic meltdown. The other drawback of the sector has been the access to finance. Some key areas in the infrastructure sector especially the steel, auto, fertilizer, refineries and oil and gas exploration sectors which are facing capital shortage. Apart from this the industry has been clamoring for various other sops.Tax holiday under section 80ID for hotels be extended to 10 years from 5 yrs. Extension of external commercial borrowing scheme to the entire Indian real estate sector including Special Economic Zones. Both FICCI and ASSOCHAM have demanded reduction of stamp duty rates across the states to 2 percent, which varies between 5 percent to 14 percent. For the consumers there is a demand for an increase in deduction available under section 24(b) to Rs 300,000, against, existing limit of Rs 150,000 for self occupied houses. Increase the basic exemption limit under provisions of Wealth Tax Act to Rs 50 lakhs against existing limit of Rs 15 lakhs keeping in perspective the price of property, etc. Service tax provisions to be lifted in case pre-construction sale of residential complex where the seller and the buyer enter into an `agreement to sell`. Abolition of service tax on renting immovable property. Widen the scope of FDI in real estate. Reduction/ rationalization of customs duty (exemption from special additional duty) and excise duty (8 percent to 4 percent) to reduce cost of borrowing. Union Urban Development Minister Jaipal Reddy Reddy has suggested extension of loan at the rate of 7.5% presently available for houses up to Rs 20 lakh to those priced at Rs30 lakh in cities. Reddy also sought more budgetary allocations for Commonwealth Games projects, DMRC extension and JNNURM projects. Assocham, a premier industrial body asked government to set up a Rs 1 trillion revolving fund to assist the infrastructure firms. A revolving fund is a fund or account whose income remains available to finance its continuing operations without any fiscal year limitation. One of the happier consequences has been the rediscovery of the low priced segment. Tata has led the way with a housing scheme within 10 lacs for a flat. Others are expected to follow suit. The government may well want to provide incentives to companies that develop low priced housing. Will Budget heal the bleeding Textile Sector? The textile industry is one of the hardest hit due to recession. The USD 52 billion labour intensive textile sector contributes 13 percent to total Indian exports. The sector has shown a steep decline in its sales. This can be attributed to lower demand from the overseas markets like US and Europe - which together contribute about 60 percent of the total exports of the textile industry. The demand was so low that it raised fear of textile exports going into negative curve in the current FY. The rupee appreciation has also added to the burden of the exporters as the depreciation in the US dollar resulted in the fall in the demands of their products. Already the sector has lost more than one million jobs in the last one year. Expectations: Expectations include increase in duty drawback and DEPB rates for synthetic textile items to 5 percent from 3 percent and finance for exporters at an interest rate between 4 and 6 percent. Also the industry wants the interest rate subvention be raised to 4 percent from 2 percent for synthetic textiles exports and the timeframe for the subvention be extended up to March 31, 2010. Other demands includes reduction of excise duty on all textile machineries to 4 per cent from 10 per cent, duty on polymers used in the manufacture of polypropylene filament yarn be cut to 4 percent and special additional duty of four per cent be abolished for textile items. Formation f a comprehensive national fibre policy, faster clearance of arrears on terminal excise duties and CST are also among long standing demand. Exports Sector Indian exports were expected to touch USD 200 billion mark in the year 2008-09 but they missed it by a big margin and were put at USD 168.7 billion with a mere rise of 3.4 per cent year on year. The April export data released by the govt showed the sharpest fall in last 14 years. The new Commerce and Industry Minister Anand Sharma has specifically pushed for incentives to handloom, textiles, leather and plantations industries, apart from labour-intensive units. Demands: Rs.5,000-crore market development fund, elimination of the fringe benefit tax, income tax exemption, reduction of interest rates, and speedier insurance and service tax refunds. The exporters have also asked for bail out packages for their sector besides elimination of the fringe benefit tax, income tax exemption, reduction of interest rates and speedier insurance and service tax refunds. The sector has asked for exemption of payment of service tax. Besides that exporters have been making demand for reinstating 4 per cent interest subvention on export credit and want it to last for one year. The Indian knowledge sector limps back to normalcy The Indian IT sector is still trying to get over its biggest jolt in the recent times in the form of Satyam scam. The Raju saga has tarnished the image of the Indian IT Sector. Satyam was not the lone IT giant which was on the receiving end as Wipro Technologies was also banned by the World Bank. Union IT and Communication Minister A Raja has called for extension of tax sops for the IT and ITeS Sector by two years. The concessions given to the sector under Software Technology Parks of India (STPI) have also been extended by a year till March 2010. But the uncertainty regarding STPI must be eliminated which would definitely help the crisis hit sector. The hardware industry association has asked Finance Minister to bring uniformity in the service tax and excise duty or countervailing duty (CVD). While the service tax is 10 per cent, CVD is 8 per cent for the industry. Will Telecom Sector get more talktime? The big announcement on 3G, 2G spectrum allocation will be on the agenda for the government, which is touted as revenue booster for the Centre that is still grappling with how to fund its deficit. With an array of taxes in form of service tax, license fees, spectrum charges, octroi, VAT, stamp duty, entry tax, corporate income-tax etc; the telecom sector has a long list of demands for the Finmin. One of which is rationalisation of the multiple levies into a unified levy. Indian telecom sector, which is quite lucrative for the new players, is also demanding extension of tax holiday beyond the existing provisions. As per the rules, operators were eligible for a tax holiday under 80IA of the IT Act for 10 years for operations commencing prior to March 31, 2005. The tax holiday should be re-introduced to provide a level playing field to new players. Also, in 2007, the government enacted a provision denying tax holiday to undertakings, post transfer, in a merger. The denial of tax holiday should be done away with to enable tax efficient M&A activity in this space. There is an on-going controversy on whether SIM cards sold by telecom companies through distributors and whether value-added services are eligible to service tax or VAT. A specific clarification is called for to settle this controversy. Excise duty paid on equipment is allowable as a set-off against service tax liabilities only if the equipment is installed in the company`s premises. Most of the telecom equipment (such as towers, routers, cables, modems, handsets, etc) would be located outside the company`s premises, disentitling operators to the benefit of the set-off. The Budget should introduce specific provisions enabling such set-off.Demands: Reintroduction of tax holiday under section 80IB for housing. Affordability with quality has been the hallmark of the Indian telecom success story. Prudent fiscal legislation and administration would definitely push the growth to greater heights in India. Hospitality Sector hopes for some generosity With Commonwealth Games round the corner, the Hospitality sector is hoping to get additional allocation in the budget. At present the sector is limping back to normalcy after being hit by recession and Mumbai terror attack. The hospitality sector has been demanding an industry status for quite sometime and would be keeping its fingers crossed to get it finally this time around. Besides that the sector is also in the need for a stimulus package and rationalization of taxes levied on them by various state governments. The players in this sector can be categorized under two heads: organized and unorganized sector, though part of the same sector there is a huge disparity between the players in the organized and unorganized sectors. The organized sector consists of the big star hotels catering to the elite and foreign nationals and can afford to pay heavy taxes (luxury, VAT, etc.) levied on them. On the other hand the players in the unorganized sector are opposing the heavy taxes, various license fees and other recurring expenses that they have to pay time and again. Social schemes high on UPA agenda The President’s speech to Parliament has already made it quite clear that the UPA government will lay special emphasis on education, urban development and social schemes. So the Finance Minister is expected to give due attention to these sectors. In addition to the Rs 34,000 cr in the interim budget the government is expected to allocate more funds to the education sector. The total funds allocated for education sector has been Rs 49,500 cr including the funds for opening eight new IITs and 16 central universities. Rs 7,000 crore more may be allocated to the HRD ministry for setting up model schools and colleges in educationally backward areas and for the expansion of Sarva Siksha Abhiyan to the upper primary level. The job guarantee scheme, NREGA, may get more allocation as its coverage would be extended to new areas other than the traditional works like digging land and building roads. Money may be allocated under the proposed National Food Security Act under which the families below the poverty line would get 25 kg of rice or wheat a month at Rs 3 a kg. This, according to estimate, may put an annual burden of about Rs 26,000 crore on the exchequer. Delhi will get Rs 2,000 crore for Commonwealth Games 2010 — up from the Rs 500 crore promised in the interim budget. The rural development ministry`s allocation is expected to be increased by Rs 4,000 crore, which will take the total budget of the ministry to Rs 70,000 crore, highest for any social sector ministry. The allocation to health ministry is expected to increase by around 25 per cent. The government is set to increase the budget of JNNURM being handled by housing ministry and urban development ministry. Under Bharat Nirman, the power ministry is expected to get additional allocation of Rs 8,000 crore which means the total budget of the ministry would be over Rs 60,000 crore. In its bid to give relief to the tax payers government might take some more time to provide tax benefits for those opting for NPS at the time of withdrawal. PFRDA further said that the tax exemption issue at entry stage is under the active consideration of the government and expects the Budget to come out with some clarifications on the issue and that will give boost to the NPS. How taxing will the budget be for you? In the times of recession every household is expecting the Finance Minister to give them some relief by raising the exemption limit of income tax and bringing down the tax rates. With the inflation slipping into negative zone, higher purchasing power of people may well result in much needed price rise. The economy depends a lot on the domestic demand and that is why the public can expect some surprises for taxpayers. The government is also quite keen to let the money go into the pocket of the consumers. The economy is still not showing any signs of revival and the government is maintaining secrecy about the tax rates in the budget. Demands: CII has asked government to raise the threshold income tax exemption limit by Rs 50,000. Union Development Ministry has asked for Rs 3 lakh tax relief on home loan. The ministry has also recommended Home Loan for poor at 6.5 per cent for houses falling in the category of below Rs 5 lakh. The ministry has also pitched in to cut interest rates for the houses upto Rs 30 lakh. CII has also suggested the abolishment of fringe benefit tax or be allowed as a credit against income tax and bringing down Central Sales Tax rate to one per cent. Demands have been made to the government to bring uniformity in corporate tax and abolish all surcharges on it. Government’s new pension scheme has been a big failure so a few changes in the scheme’s terms and conditions cannot be ruled out.