budget expectations2013 14

7/28/2019 Budget Expectations2013 14

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Budget Preview: 2013-14


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The budget for the nancial year 2013-14 is round the corner and the market expectations are high from this

budget as this will be the last budget by UPA before general elections and so market is expecting it to bepopulist in nature. The FM may also look towards the wishlist and hopes of many corporates which re-

volves around variety of duty cuts across sectors which are expected to heighten the investment as well as

the demand and will contribute to the consumption led economy also.

There are a total of 72 bills in the agenda during this budget session, which if passed can bring the

optimism forward and rev up sentiments. Some of the important bills are:

The Finance Bill

Lokpal Bill National Food Security Bill The Whistle Blowers Protection Bill Insurance Laws (Amendment) Bill & PFRDA Bill Womens Reservation Bill Grievance Redressal Bill Real Estate Regulatory Bill Educational Tribunals BillBesides, there are some peripheral issues, which if addressed can ginger up corporate sentiments like the

Securities Transaction Tax (STT), Minimum Alternate Tax (MAT), etc.

No tax on dividends from overseas

Over the last few years, corporate India has emerged as an active global player. Indian business houseshave made investments and acquisitions, however, the returns from these investments, when broughtto India, suffer tax unlike domestic dividends which are tax free in the hands of the recipients. In thelast Budget, the rate of tax was reduced to 15%. Such dividends received out of tax paid prots over-seas and subjected to withholding taxes in those jurisdictions, should not be subjected to further tax inIndia on remittance.

Basic customs duties to continue at existing levels till GST is introduced

Domestic Industry continues to suffer from cost disadvantages on account of higher local taxes such asVAT, octroi and entry tax as also due to higher cost of nancing and inadequate infrastructure. Domes-tic industry deserves a minimal level of protection to compete with imported goods. Basic customs du-ties should continue at existing levels till such time a comprehensive Goods and Services Tax is intro-duced and the cost of nancing and cost of infrastructure and transaction costs is reduced to competi-

tive levels.

Union Budget 2013-14 - Expectations

Wishlist for Union Budget 2013-14


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Immediate implementation of GST

The recent move by the Finance Minister in reviving the move to introduce GST, sooner rather thanlater, is indeed welcome. We strongly supported the introduction of GST and believe that this willgo a long way in streamlining the economy and provide impetus to the growth of our GDP. Also, itis important that the framework of GST should encompass the multiple taxes currently levied atthe state and local levels and should subsume all of them.

Provide clarity on newly implemented Service Tax

A comprehensive service tax based on the concept of a negative list of services has beenintroduced with effect from July 1, 2012. It is an important step towards introduction of GST.However, it is noticed that while the levy is universal in its application (barring the negative listand exemptions); there are restrictions on the availment of Cenvat credit. All input side tax costsforming part of the price of the nal output goods or services should be allowed as credit. Further,

several doubts have been expressed about the scope of the new levy. Some of the issues requiringclarication have been listed in the memorandum. The Ministry of Finance should issueclarications on these issues at the earliest to avoid litigation.

Improving Dispute Resolution Processes

The key concerns of the taxpaying community are the prolonged litigation and the need to makeon account payments in the interregnum. The Dispute Resolution Panel (DRP) and the MutualAgreement Procedure (MAP) in the context of Direct Taxes have not proved effective mechanismsin this regard.

Corporate India strongly recommends that a conciliation bench should be formed, and which canbe approached by a tax payer to help settle tax disputes. This will ensure that where a tax payerhas already got a favorable resolution of a dispute on a matter, the dispute is not continued inlater years. Similarly, non-resident tax payers can focus on quantum of prots attributable to aPermanent Establishment or the adjustment on a Transfer Pricing issue. In respect of IndirectTaxes too, because of pressure of maximizing revenue, show-cause notices / demands areconrmed by the tax ofcers even when the matter may be legally untenable. The adjudicationprocess take years to conclude and matters get nalized in higher courts. The lengthy litigationprocesses result into huge litigation cost for the taxpayers.

Apart from suggesting timely adjudication of matters, Corporate India has requested thatadjudication ofcers should be disengaged from the duties of revenue collection to minimize therevenue bias.

Reverse Recent Increases to Service Tax Rates

In light of concerns that the Indian economy is slowing, Industry urged the government toreverse recent increases to service tax rates, back to the 8% rate in place two years ago, from thecurrent 12% rate.

Furthermore, to encourage foreign direct investment in the nation's embattled aviation sector,the Industry asked the government to exempt the domestic repairs, maintenance and overhaulservices sector from service tax.


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Real Estate Regulatory Bill

The Budget session of Parliament will have the much awaited discussion on the Real EstateRegulatory Bill. According to recent reports, the Bill aims to establish a regulatory authority forenforcing fair practices and accountability norms and fast track dispute resolution mechanism inreal estate transactions. If the bill is framed right, this could change the face of real estate in India

and bring in the much needed reforms in the industry.

The Bill is a very good opportunity for the government to give some structure to the currentlyunorganised real estate sector. The government should take an unbiased approach towards thisbill which would benet the industry and its stakeholders customers, developers, bankers etc.The Governments proposed initiative to fast track approvals by putting up the status online willbring in the much-needed transparency and accountability to projects.

The real estate sector is denitely a high growth area for the country. The focus should be onproviding the right quality of living to everyone. At present builders are taking the initiative toprovide quality and environment-friendly living spaces. This change has to come from within the

industry rather than over-regulation. Incentivizing may be the best way to go forward. The Bill

should help drive up consumer condence.

Budget needs to focus on promoting infra investment

Industry has sought urgent steps in the forthcoming Budget to make the infrastructure sectorviable and capable of attracting capital. Given that the 12th Plan envisages an investment of $970billion in infrastructure, nearly half of which is to come from the private sector, urgent measuresare required to make the sector viable and capable of attracting capital.

Among the key measures suggested to provide a llip to investment in the sector, Industry hasasked for exempting infrastructure companies from the payment of Minimum Alternative Tax.

Currently, infrastructure projects are entitled for a tax holiday under section 80IA for 10consecutive years during the rst 15/20 years of their operation. In order to reduce the construc-tion and operation cost of projects, Industry is in favour of restoration of section 10(23G).

By exempting the interest income of the nancial institutions received from the Rupee term loannanced to the companies eligible for claiming deduction under section 80IA(4), this will greatlyhelp in countering the high interest rate environment for the infra companies.

Further, given the rapidly growing demand for housing from the low middle income population, itis critical to promote low cost housing. Currently, the government offers interest subvention of oneper cent for low-cost housing loans up to ` 15 lakh, provided the housing cost does not exceed`25 lakh.

Industry recommends that interest subvention scheme is extended to total housing cost of up to` 35 lakh. This sector has one of the largest multiplier effects and so, an incentive for investmentsin low cost housing would create demand in over 200 industry sub-sectors.

For restoring condence in the power sector, Industry has urged the ministry to continue taxbenets for the sector under Section 80 IA sunset clause, which entitles a company for tax benets

only if it starts generating power by the end of the current nancial year. In order to attract hugeinvestment in power generation, Industry wants extension of the sunset clause under Section 80 IAtill the end of the 12th Five-Year Plan period.


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Automobiles

Change in Excise duty - No excise duty hikes for two wheelers / commercial vehicles / small cars.Additional diesel tax on passenger vehicles could be a big negative.

Continuation/Increase of allocation to schemes for NREGS (National Rural Employment GenerationScheme) and infrastructure/road/housing development.

Companies to watch out -Ashok Leyland, Bajaj Auto, HeroMotoCorp, Maruti Suzuki India, and TataMotors.

Capital Goods

Substantial increase in Defense budget allocation. Fund allocation for various programs including APDRP (Accelerated Power Development and

Reforms Programme ) and RGGVY (Rajiv Gandhi Grameen Vidyutikaran Yojana ) expected tocontinue.

Companies to watch out -BEL, BEML, BHEL, and Power Grid.

Cement

Thrust on higher infrastructure spending

Tax incentive on housing sector should continue.Companies to watch out-ACC, Ambuja Cement, Grasim, India Cement, and Ultratech.

Hotels

Infrastructure status to Hotel Industry This is old demand from the hotel industry. Such a grant will lead hotels to re-invest their prots in

the hospitality sector, channelize huge investment in the tourism sector and help bridge theshortfall of hotel rooms.

Companies to watch out-Indian Hotels, Kamath Hotels, and Taj GVK.

FMCG

Increase in excise duty would be negative for FMCG players as it would negatively affect demand.However, FMCG players are expected to pass on the increase in excise duty.

Companies to watch out ITC, GCPL, Dabur, and HUL

Sectoral Expectations


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Infrastructure and Real Estate

The real estate sector has been asking for tax breaks under Section 80 -IA of the Income Tax Act tobe extended to the housing sector. Section 80-IA was introduced to promote private participationin the infrastructure sector. Under this rule, infrastructure companies are entitled to a 100 per cent

tax holiday for 10 years.

Realty companies argue that the shortfall in the number of housing units can be bridged by grouphousing projects. These will include amenities such as roads, schools, hospitals and retail outlets,leading to infrastructure development. Hence, they argue, infrastructure status should be given todevelopers building townships or large-scale affordable housing.

Building affordable housing for economically weaker sections has largely been the responsibilityof the government. In recent years, some realty companies have tried to develop such housing butmost pulled out due to the low margins, which are well below those in the upper-mid and luxurysegments. There are expectations that tax concessions could bring these developers back into

affordable housing.

With infrastructure status, developers can also get access to funds from India InfrastructureFinance Company Ltd, which gives loans at lower interest rates than commercial banks.

Companies to watch out L&T, HCC, NCC, Sadbhav Engg., JP associatesIT

Exemption of MAT on units operating under SEZ ( Special Economic Zone) e

-Governance initiatives

Education allocation Companies to watch out TCS, HCL Tech, Educomp, NIIT Ltd, Everonn

Logistics

Railways - to encourage private sector players to procure more wagons Increased allocation of funds for building roads, ports and other utilities Companies to watch out GDL, ConcorPower

Continue tax benets for the sector under Section 80-IA sunset clause, which entitles a companyfor tax benets only if it starts generating power by the end of the current nancial year. In orderto attract huge investment in power generation, industry wants extension of the sunset clauseunder Section 80 IA till the end of the 12th Five-Year Plan period.

Companies to watch out - Tata Power, NTPC, and JSW Energy


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Pharmaceuticals

Healthcare sector should be granted infrastructure status. Increase in allocation on Healthcare infrastructure and National Rural Health Mission. Lifesaving drugs should be fully exempted from the custom duty. Companies to watch out - Cipla, Dr. Reddy's Laboratories, Lupin, Torrent PharmaBanking and Financial Services

Increase in limit of renancing from IIFCL for infrastructure sector projects Allocation of equity capital for infusion in PSU banks Increase in tax exemptions on individual housing loans Companies to watch out PFC, REC, IDFC, SBI and other PSU banks


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Expectations for Precious Metals Industry

Recently, the governmenthiked import duty on gold to six per cent from four per cent to curb demandand check high current account decit. In view of that, Gems and jewellery industry has demandedreduction in gold import duty and imposition of simplied tax regime to boost gold and diamond tradein the forthcoming budget.

To offset losses caused by uctuations in the rupee, the GJEPC (gems and jewelry export promotioncouncil) wants the RBI to set up a special fund worth USD 3-5 billion to renance borrowings of

exporters. This will bring exporters to currency market for hedging.

Govt. may provide tax incentive on gold linked nancial instruments. RBI panel has favoredgold-backed investments and may promote more products on gold which may attract investors. Thegovernment is looking for avenues to curb import of physical gold. The Reserve Bank of India's (RBI)working group has recommended setting up of Bullion Corporation and introduction of gold-backednancial instruments. Corporation may function as a Backstop Facility providing liquidity for lendingagainst gold or as a renancing agency. In addition to functioning as a Backstop facility, it can alsoundertake retail transactions in gold through pooling of gold. Besides, the Corporation can be the nod-al agency for deciding all policies related to gold and innovation of gold-backed products.

In the ultimate analysis, demand for gold is a function of economic growth, import duty, exchange rate,ination, interest rates, alternative nancial instruments, easy availability of credit and the currentaccount transactions. Any strategy to reduce the demand for gold will have to consider the trends ineach one of these parameters to evolve an appropriate gold policy. The crux of the problem is theabsence of nancial instruments that provide exible liquidity options, while providing real rate ofreturn to investors. There should be innovative products in the market to provide hedge againstination to the investors.

The GDP for the current nancial year is unlikely to cross the 5.9 -6% mark - the predicted 8% in GDP

growth is highly unrealistic. Hence the forthcoming budget may come up with some immediate andeffective announcements to remedy the situation. In recent quarters, the Government and the RBIhave been unable to curb the ination to a more comfortable level of around 5-6%. Considering thatthe upcoming budget is expected to be a populist one, given the Union election ahead in 2014,addressing the compromised GDP and skyrocketing ination must be given highest priority. Thegovernment should look at outcome-based spending and not just outlays. The government should notinterfere with the price discovery process of any commodity and create price caps that impede supply,create shortages and price rises. The top priority for the government should be to keep a check onscal decit. The government should also work at providing better environment for businesses thatcreate more jobs.

Commodity & Currency Market


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Expectations for Currency Market

The government should nd ways to increase more retail participation in the Forex market. Currentlywe have options on USDINR only and it would be a great step if options are also allowed in othercurrency pairs which will allow traders to hedge their positions with options. The government shouldalso look into providing trading in other currency pairs like Australian dollar.

In order to avert the rating downgrade by major credit rating agencies government may take somestrict steps in this budget to avoid the soaring scal and current account decit, which is likely to stemthe falling Indian rupee. These steps include imposing the government duty on gold and crude oil tocurb the soaring import bill of India.

Government is likely to announce measures to narrow the trade decit by increasing the exports. Thenance minister must give sops for exports, which will slash the trade decit. Also, Finance Ministercould take measures to increase domestic savings.

Indian FM could, however, go in for a tax on the very rich. In short, a large part of the improvement will

have to come from non-tax receipts, such as divestments. Trend of more domestic savings has to be

encouraged, by giving more incentives to people to save in nancial instruments. Government alsocould lay out the timeline for the implementation of the goods and services tax.

In order to ensure robust capital inows, he could announce measures that would help the capitalmarkets, which would support his divestment agenda and allow foreign institutional investors funds toow into debt markets, lowering interest rates. Also, steps can be announced to get domestic investorsback into the markets.

Government can aim for further reforms, such as the pension and insurance bills, freeing up foreign

direct investment further, and making the tax code more investment friendly. The reforms momentumneeds to be carried forward in the budget. Ultimately, credible supply-side structural reforms, not all ofwhich can be addressed by the budget, are needed to restore condence in the economy.

Expectations for Metals Industry

A bill to develop the commodities futures market could be passed in the forthcoming Budget session ofParliament, Food and Consumer Affairs Minister KV Thomas said. This bill is crucial for the commoditymarket as exchanges will be able to offer more products like options etc. to hedgers and other

participants. Also FMC will have more powers after this bill is passed. Market will be able to attractmore number of participants and availability of more avenues will drive volumes.

Govt. may avoid Commodity Transaction Tax (CTT) for now as this may divert hedgers and speculatorsto rampant dabba trading. The CTT of 0.017 per cent on commodity derivatives was levied in the2008-09 Budget, but was not operationalised and was kept in abeyance.

Infrastructure spending is likely to be increased in this Budget which will underpin demand for metalsin the country. Affordable housing may receive Infrastructure status in this budget. This will attractmore builders in this eld to avail tax holiday and may generate more demand of metals.

Govt. may protect domestic aluminium industry. Increase in basic customs duty on aluminium productswhich is currently 5% will help domestic players from competition from international market.


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The growth for Agricultural and allied activities for the Year 2012-13 is expected lower at

1.80 % vs 3.60 % in 2011-12 as per CSOs latest Advanced Estimates. Again, with the

Ination rate remaining a huge concern at double-digit for most part of this Financial Year,it has become imperative for the Govt to focus on both short term and long term measuresto tackle the rising demand and stagnant production in the Agricultural sector. We proposethe following expectations for the Agri sector:

More investments in storage of goods:

Reports of wastage in commodities like Wheat have regularly been there. This could be

avoided by more investments in the Warehouse sector. Incentives should be given to theprivate sector for their participation in Procurement, Storage and Distribution activities.Higher the number of participants, lesser would be the problems associated with theseactivities. Broader participation of the Private sector is necessary in this regard. Incentiveslike Tax holidays, concessional loans , infrastructural facilities etc need to be given to theprivate sector so that they are able to actively participate in these activities

Proper distribution channel:

Despite higher production of Foodgrains, there have been reports of Foodgrains rotting in

the open due to lack of storage facilities and inadequate infrastructure and channels to takethe stocks out and distribute them. There should be easing of bottlenecks in Govt policy andinfrastructure so that the goods could be distributed to the necessary places with minimumtime lag

More subsidy on loans to farmers:There should be focus on increased nancing through proper Govt agencies at lower costs

for increased sowing of crops for the farmers

Agricultural Sector


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Petrol/Diesel prices:

There has been a signicant rise in Petrol/Diesel prices that had created an upward thruston the price of goods. The Govt should ensure reduction in freight charges and increasingsubsidies for transportation of goods to keep prices under check

Facilitation of Institutional Credit for Agri inputs:

for the farm sector to raise agri productivity. Availability of Fertilizers, seeds and other inputsneeded by farmers should be ensured at low rates. There should be scope for promotinggreater investment in agri infrastructure and increased expenditure on irrigation. Raising thesubsidy on Fertilizers for small farmers could enable them to raise productivity of the cropswhich have been stagnant over the last few years for most crops.

Increased spending on upgrading Weather Forecasting system:

Crops have been subjected to adverse weather conditions. Crop Insurance schemes shouldbe made adequately available to farmers to prevent them from incurring losses. Apart fromthat, focus should also be there on the Weather Monitoring system. Upgradation of weatherprediction channels could ensure better predictability of the Monsoon and other factorswhich could enable farmer to take informed decisions

Mandi Taxes:

This should be reviewed as higher taxes can raise prices

SSI:

More benets and concessions to the Small scale Food Industries which are activelyinvolved in import/export business so that they can compete in the Indian and theInternational markets


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Tariff structure:

for imports and exports should be kept in a manner so that it is benecial for theconsumers and also safeguard the interests of the farmers.

Encourage private participation in the Agri sector:

for adoption of new Technologies by providing Tax incentives. This could enable not onlyhigher productivity but also ensure efcient distribution of goods

More focus on education of farmers:

This can be done by encouraging Agri Educational Institutes through proper nancing totake up education of farmers in a large scale. Higher knowledge would enable farmers to

take informed decisions on various aspects of his work. Encouraging more investments inR&D in the Agri sector could also have a benecial long term impact on the Farmproduction

Investments in Transportation and Infrastructure like Roads and Railways:

This could help in reducing the cost of transport and the time needed to shift goods from 1place to another. A faster transport facility could prevent any signicant rise in price in AgriCommodity from shortage in any part of the country


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Tariff structure:

for imports and exports should be kept in a manner so that it is benecial for the consumersand also safeguard the interests of the farmers.

Encourage private participation in the Agri sector:

for adoption of new Technologies by providing Tax incentives. This could enable not onlyhigher productivity but also ensure efcient distribution of goods

More focus on education of farmers:

This can be done by encouraging Agri Educational Institutes through proper nancing totake up education of farmers in a large scale. Higher knowledge would enable farmers to

take informed decisions on various aspects of his work. Encouraging more investments inR&D in the Agri sector could also have a benecial long term impact on the Farm produc-tion

Investments in Transportation and Infrastructure like Roads and Railways:

This could help in reducing the cost of transport and the time needed to shift goods from 1place to another. A faster transport facility could prevent any signicant rise in price in AgriCommodity from shortage in any part of the country


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CTT imposition:

A few years back, in the union budget 2008-09, the Indian government has proposedimpositions of commodity transaction tax (CTT) of 0.017%. The rationale for the same wasto check price rise and volatility, check speculation, generating revenue and increasing

transparency in dealings.

Results have however suggested that there exists a negative relationship betweentransaction cost and liquidity, and a positive relationship between transaction cost and vol-atility.

Thus if the Transaction cost is raised, liquidity of the markets would fall and that wouldresult in increased volatility and hence increased speculation for the commodities. Thus theobjectives of achieving price discovery from the Futures market may be negated.

The proposal currently under consideration relates to CTT on trade transactions ofnon-farm commodities which account for over 80% of commodity Futures transactions. Wetry to analyze why it may not be benecial for the Commodities markets:

Results have shown that the securities transaction tax (STT) has resulted in a shift involumes from domestic to foreign markets. While SGX Nifty volumes more than dou-bled in the last ve years, the high transaction tax in India led to Nifty futures volumeson the NSE falling two thirds. Foreign institutional investors have alternatives like SGXNifty, where transaction charges are much lower.

Imposition of CTT, in line with STT, would result in Commodities volumes shifting toillegal markets (resulting in more acute problems associated with Dabba Trading) or toforeign bourses, as the tax would add to trading and hedging costs. Liquidity fromintraday arbitrageurs would be heavily impacted

For getting Fair price discovery of Commodity prices through the Futures market, it isessential that more and more participants are there. Imposition of CTT would add tothe rise in cost - leading to shift to other avenues and a resultant fall in number ofparticipants

budget expectations2013 14

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