Hard luck for the cement sector in this budget (2004-05)
Shashank Dev Sondhi The cement sector has been in the news in the past few weeks, especially, after the 3.37 per cent slump in output last month. The fact that this happened after a 17 per cent rise in coal prices, coal being an important raw material in cement manufacturing, it seemed like fuel was being added to the fire. The cement sector hasn't been in good spirits for a while. The players that didn't show a significant loss from last year's figures were only biggies like Grasim (3.5 per cent profit) and Gujarat Ambuja (0.85 per cent) cements. The promotion of infrastructure development in the remainder of this financial year was an indirect hint towards things looking up but there were no relievers for this sector. The expected decrease of duty on cement and clinker from Rs 400 per tonne to Rs 350 per tonne didn't happen. Add to this the fact that people transporting goods by road have to pay additional service duties and the situation seems gloomy and dismal since a major part of cement transportation is done over the road especially to rural areas. The up side of the entire situation was that there weren't any increases in duties for this sector. At least, the promotion for rural housing development projects and infrastructure development will ease their anxiety. As far as concessions and duty relaxations in this sector concerned, sorry, hard luck.
To alloy or not to alloy that is the question
Shashank Dev Sondhi To actually analyse the effect of the budget 2004-05 on the steel sector let us just see the types of steel being addressed: Non- alloy steel:
Used to make girders, knives, razors, swords, dia-magnets and magnetic needles Alloy steel types:
Manganese Steel: Used to make helmets, safes
Invar steel: Used to make pendulums, measuring tapes
Nickel Steel: Used in making cables
Chrome steel: Used to make cutting tools.
Stainless Steel: Used in cutlery, food processing tools
Chrome-vanadium steel: Used to make springs, shafts and axles. Thus, by just taking a cursory glance through the list one notices that alloy steel has larger industrial applications in each of the segments as raw materials. Increasing the excise duty on alloy steel would mean more consistent income for the government but it would deal the steel finished-product-manufacturing segment a real blow. This would include big corporations in the heavy automobile, light automobile, food processing, and mining sectors. No wonder some of the key steel players have expressed their aggravation against P Chidambaram's budget speech for 2004-05 on learning of the 4 per cent hike in the excise duty on alloy steel from 8 per cent to 12 per cent. In his budget speech P Chidambaram stated that, in the past, the excise duty on steel had been lowered to 8 per cent only to result in the steep rise in steel prices. With the hope that revenue losses concurred from February 2004 be nullified, the FM raised the duty on alloy steel to 12 per cent but lowered the duty on non-alloy steel to 10 per cent from 15 per cent. One could interpret this as a method of ensuring that the compensation in the revenue happens promptly so that the next budget speech sees a decrease in duties for both steel types. This may be the long-term vision that Chidambaram has but it is still indigestive by the role-players in the steel sector Tat steel included.
People first, companies later - says the budget to the pharma sector
Shashank Dev Sondhi Though the budget has had a very balanced effect on the sectors in general and has plugged the holes when compared to the last one, the most emotionally confused sector, as far as the budget goes, would be the pharmaceutical sector. A few things which are positive in their effect on the pharmaceutical sector would be : - The expansion of the waiver of the customs and excise duties on the hepatitis B diagnostic kits so as to encompass the diagnostic kits of all forms of hepatitis.
- Implementation of value added tax (VAT) from April 1, 2005 will help the pharmaceutical industry, as one single rate of 4 per cent will be implemented throughout the country and not different rates in different states as is the currently practice.
- Within the pharmaceutical sector, the healthcare segment has received some special treatment in the form of a number of concessions.
- Rural hospitals with 100 beds will get 80(I)(B) concessions.
- The revamping of the universal health insurance scheme with lower premiums and higher premium subsidies so as to increase its spread in the populace below the poverty line. The expected figure of increase in spread is 10 lakh in this financial year.
- In addition to the above, there is a proposal to introduce a new Group Health Insurance Scheme through public sector non-life insurance companies. The insured will be members of Self-Help Groups (SHGs) and other credit linked groups (CLGs) who avail of loans from banks or cooperative institutions. Under the group health insurance scheme, the premium will be Rs.120 per person, but the insurance cover would be for a sum of Rs.10,000.
- In this budget a greater amount has been allotted for the HIV/AIDS control campaign.
Antagonistic in effect are issues like : - The 2 per cent mandatory education cess may lead to a marginal rise in the costs of drugs.
- The pharmaceutical companies are still in a dilemma whether the additional duty will be born by the company or passed on to the consumer.
- The prime target of the budget as far as the health care sector goes is the rural segment. The pharmaceutical companies have shown displeasure with this approach as their target segment is the urban one.
As far as the pharmaceutical companies go, the budget was made purely from the people's point of view and so the companies feel left out. Some of the hospital senior executives say that the fact that rural hospitals with 100 beds will get 80(I)(B) concessions is a clear recognition of privatised effort towards catering to rural health care demands. On the other hand, a more general catering to all hospitals would have gone down better with them. Each and every sector was looking towards getting a piece of the action as far as promotion of foreign investment was concerned but the degree of promotion in the pharmaceutical sector has led companies to express disappointment. Some are happy that the waiver of customs and excise duties now covers a wider range of life saving as well as important drugs. Others are of the opinion that though the overall effect of the budget is positive towards the reach of basic medical facilities in rural areas it does not, in any way, decrease the tension of various foreign multi-national pharmaceutical companies which are still looking tentatively to India as far as setting up their R&D centres here are concerned. The fact that there has been no hike in the income tax exemption limit on R&D expenses from the existing level of 150 per cent weighted deduction can be detrimental as far as the tentative MNCs are concerned and could sway their decision against setting up R&D facilities in India. It is pretty clear that the budget has put the urgency in fulfilling the people's needs above all other aspects. Political or sentimental? Its hard to tell. Agriculture
Anirban Biswas Agriculture in India has seen a number of concessions on excise duty on this budget. Government is going to start a massive nationwide water-harvesting scheme for farmers belonging to scheduled castes and tribes. Moreover, one lakh irrigation units are going to be revamped using assistance from NABARD and 50 per cent subsidy is to be provided for such schemes.
Among the other announcements, food grain production to be moved up to 300 million tonnes by 2011-12; fiscal instruments will be used to enhance investment in agriculture. Tractors, dairy machinery, spades and shovels will be fully exempted from excise duty.A corpus of Rs.8000 crore will be provided for Rural Infrastructure Development Fund during 2004-05. A scheme to repair, renovate and restore all the water bodies that are directly linked to agriculture will be launched. In the current year, the Finance Minister has proposed to begin with pilot projects in at least five districts to be selected in each of the five regions of the country. The estimated cost of this project will be Rs.100 crore.
Under diversification of agriculture, National Horticulture Mission will be launched to double the horticulture production by 2011-12. States will be encouraged to emulate the Anand model and establish a State Level Cooperative Society. Government also proposes to launch a National Horticulture Mission. Government will also facilitate farmers to diversify into oilseeds.
The urea manufacturers are likely to benefit from increased focus of the government on the agricultural sector; the benefits are likely to accrue over the long-term.
Education and health sectors are fine-tuned to encompass the people who need them the most
Shashank Dev Sondhi This time in the budget speech for the financial year 2004-05 the finance minister (FM), P Chidambaram, put down one of the objectives of the budget as -"Providing universal access to quality basic education and health". He also made it clear that this aim would heed and attempt to meet the needs of the poor. As he quote in his speech, when addressing the issue of assault on poverty and unemployment: "One of our greatest assets is our human resources, our people. Empowering the people, especially the poor, with universal access to education and health, and facilitating their full participation in the growth process through gainful employment, will enhance their welfare." He also went on to state that the demands of the poor, which seemed to fall on deaf ears in the past, would receive attention. In his own words: "The poor want basic education for their children: we shall provide it, ……" "The poor want drinking water: we shall ensure that every habitation has an assured source of drinking water." "The poor want basic health care, medicines at fair prices and a doctor within a reasonable distance: we shall ensure that the public health system has adequate human and financial resources to provide basic medical care. " "The poor want jobs for their children: we shall ensure that through higher investments, and through targeted intervention, jobs are available to them. " When addressing the issues of the education and health he stated a personal interest in the matter of basic education reaching all children and as a result to ensure aid from all sectors a cess of 2 per cent has been laid down as a mandate. This is expected to yield approximately 4,000 to 5,000 crore, which shall be invested wholly in the educational sector. In the past, it was seen that one of the prime problems faced by the children of the poor, when attending school, was the child's going hungry during the day, as a result of which it was preferred by the impoverished parents that the child work to earn his/her daily bread rather than spend that time in school. This issue has also received a unique stand and now the midday meal scheme which was implemented in states like Tamil Nadu and Maharashtra, and received a very positive response, will now be implemented on a nation wide scale. The FM also expressed a concern regarding the technical education as meted out by the ITIs (Indian Technological Institutes) and stated them as a source of skilled manpower in the country. To aid them the government has undertaken the task of upgrading 500 ITIs over its tenure of 5 years averaging 100 ITIs a year. He also welcomed the chamber of commerce and industry to aid the government in its endeavour. He also announced that the waiver of collateral, which had been provided on education loans till Rs. 4 lakh in the past, had been raised to encompass loans till Rs 7.5 lakh and 15 lakh for education in India and abroad, respectively. This step will ensure that no one seeking admission to premier institutes in India or abroad will ever be denied their seat due to a dearth of funds. The issue of India's sorry state concerning computer awareness were also addressed indirectly by the waiving of customs and excise duties on PCs thus promoting greater affordability and consequent wider coverage. The health sector issues also received a note. A revamping of the universal health insurance scheme was suggested so as to address the people below the poverty line (BPL) as it was seen that the premium was too high for them. So, the premiums may be slashed to Rs 165 for an individual, Rs 248 for a family of five and Rs 330 for a family of seven to specifically target the people below the poverty line. To offset this the premium subsidy will be increased. The estimated cost to treasury is approximately Rs 40 crores, which if fully spent, should lead to the numbers issued to 10 lakhs. The sum of Rs 259 crores will be allotted in the endeavour to stop the growth in the number of HIV/AIDS infected people. This will be invested in the creation of greater awareness through public awareness campaigns, promotion of safe sex through condom usage, prevention of drug abuse and distribution of disposable syringes to name a few. Concessions for the health sector were also laid down. Customs, excise and CVD duties on rehabilitation items like talking books, Braille computer terminals, Braille writers, typewriters etc. will be waived in full. Even restrictions on certain import duties availed by the visually impaired and the hearing impaired will be dropped. Crutches, wheel chairs, walking frames, artificial limbs, etc. for the disabled will also be fully exempt from customs duty. The earlier allowance of 16 per cent concessional excise duty on ambulances used by government and municipal institutions will now encompass any registered medical institutions' ambulances. Earlier, diagnostic kits for the detection of Hepatitis B alone were exempted from excise duty. Now, the diagnostic kits for any type of hepatitis shall be exempt from excise duty. Unfortunately contact lenses shall have the excise duty levied on them. The 2 per cent cess will lead to a rise in the prices of drugs. Thus it was clear that the budget clearly paid due attention to issues and requirements of the needy while causing the well-off marginal inconvenience. A very precarious balancing act executed efficiently.
Centvat waiver cheers textiles industry
Shubha Madhukar The finance minister's announcement to discontinue the mandatory cenvat duty on textiles is a joyous occasion for the Indian textile industry. The textile industry is gearing up to face the challenges of the quota-free regime in the world textile trade, which comes into effect from January 2005. All players in the natural fibre line can now avail of duty exemption as an 'option'. The overall duty burden too has been reduced significantly. The Indian textile industry has some Achilles heels like high excise duty, high cost of raw material and components, demand constrains and high customs duty on machinery. The cenvat duty reform regime promises to take care of all of these. Under the cenvat regime, all players in handloom, powerloom and organised sector can avail cenvat exemption as an option. There will be no mandatory excise duty on pure cotton, wool and silk across the value chain. There would be an optional excise duty of four per cent as against the current eight to ten per cent. Polyester, viscose, acrylic and nylon and blended textiles would be subjected to an optional excise duty of eight per cent. Every manufacturer - big or small - will now have the option to either take the exemption route where no excise duty would be payable at any stage, except on man-made fibre and filament yarn, or the Cenvat route where credit can be taken for all excise duties paid at earlier stages. Custom duty on select textile and garment making machinery has also been reduced from 20 per cent plus CVD to five per cent plus CVD. Duty on textile machinery used in the silk industry down to five per cent plus CVD from ten per cent plus cvd. The proposal to keep the sector out of the cenvat duty ambit has been welcomed from all quarters. Handloom and powerloom owners greeted the decision with fireworks. Arvind Mills managing director Sanjay Lalbhai said, "The government has realised the potential of the textile industry to compete in the international market and the scenario that will arise out of the abolishment of quotas." The industry stands to gain enormously from the new proposals. It would remove tax-induced distortion, herald large-scale investments and enhance exports as well. The waiver is especially a good news for the unorganised sector. A large number of looms are expected to restart operations again. Weavers and mills association from all over India have welcomed the decision. Gautam Hari Singhania, CMD, Raymond, said, "The amendment of the cenvat scheme for the textile and clothing sector will come as a big relief to the decentralised sector." The small players in the garment industry can think big and have additional capacity expansion before the quota expires on January 1, 2005. In the organised sector, Raymond stands to gain substantially as excise duty on wool is down to zero. The companies into cotton like Arvind Mills, Mahavir spinning mills, Vardhman spinning, also gain from zero duty on cotton.
The textiles industry accounts for four per cent of GDP, 20 per cent of industrial output and 25 per cent of export earnings. The zero excise duty on pure cotton, silk and wool products across the value chain along with reduction in custom duty on select textile and garment machinery should be a boost to all of these. The industry would become more globally competitive and the modernisation plans for the weaving, processing and garmenting sectors can finally take off. Amidst the industry gains, the Indian consumer too stands to gain.. Fabrics and garments should become cheaper by four to five per cent. Owing to the modernisation of plants and a competitive market, the fabrics and garments should be of global quality. For the industry, this in effect would mean capacity expansion plans and more employment generation. As the finance minister said in his budget speech, these measures would rightly gear up the textile industry and make it globally competitive especially in view of the Multi-Fibre Agreement coming to an end on December 31, 2004.
PC's budget makes it easier to buy a PC*
Shashank Dev Sondhi A couple of days prior to the finance minister (FM) P Chidambaram's budget speech, the Manufacturers Association for Information Technology (MAIT) announced with pride that PC sales had shown a 32 per cent growth in the 2003-04. and had ended the year's with sales of around 3million units and that this was expected to rise in this financial year. MAIT said the sales were spurred, especially in the second half, by reduction in prices of PCs following a cut in excise duty from 16 per cent to 8 per cent coupled with a 5 per cent cut in peak customs duty and removal of special additional duty early this year. It was also observed that assembled PCs (non branded PCs) had the maximum sales contributing 53 per cent of the total PC sales. While announcing the budget for 2004 - 05 the FM stated that the 8 per cent excise duty on computers will be waived. Unfortunately, computer peripherals are not included in the bargain so they will be subjected to an additional 2 per cent cess this year. Though the end-user sees this as a good sign, the assemblers eye it with furrowed brows. Not-withstanding the local players, like Wipro and HCL and smaller players like Zenith, even the MNCs like Acer, hp and IBM see this as a sign to question the profit in assembling PCs domestically since it would make more sense to import the entire PC. The reason being that while an imported PC just gets saddled with a 10 per cent customs duty, a host of components that go into making an assembled PC still attract custom duty plus Counter Veiling Duty (CVD), which shoots up the assembling cost.
For instance, memory card, a key component of a computer now attracts 10 per cent custom duty and 16 per cent CVD. Similar is the case with heat sink, which has a 20 per cent custom duty and 16 per cent CVD and monitors which attract 10 per cent customs and 16 per cent CVD. As customer preference is for multimedia PC's, most computers are sold with speakers on which a 10 per cent customs and 16 per cent CVD duty is imposed. S Rajendran, general manager (marketing) Acer India, feels that price reduction at this stage is not likely. Computer prices in fact are likely to go up considering the 2 per cent education cess that will be imposed on some of the imported components. "While the government's intention on zero excise for PC is good, anomalies arising out of CVD need to be looked into," he said to ET. Despite India being the prime destination for software services industry and having a large population of technology workers, PC's in India are 42 per cent more expensive than in China and 32 per cent more than the global average price. The PC penetration in the country is a dismal nine per thousand i.e. for every thousand people there are only nine who own PCs. IBM India's vice president, personal computing division, Alok Ohrie said that they are assessing the impact of the excise cut on their sales. A section of the branded computer vendors are of the view that as a fully imported PC would cost less and with some local makers promising lower price, customer preference will be more for branded products. But it was seen that many of the local assemblers are of the view that since they provide better after-sales service and better-bundled peripheral schemes they will not loose their market share.
Contrary to this, others like Sunil Kumar of Lampo Computers which makes non branded assembled PCs said that if price difference between a branded and un-branded PC shrinks further, customers' preference would swing towards branded computers. This trend will hurt assemblers, he said. But the fine print is still being viewed with a fine tooth-comb, as stated by Ravi Swaminathan, vice president, personal systems group, Hewlett Packard (India), to get clarification whether a lift of the excise duty will imply a similar waiver on CVD or a substantial decrease in the same. Now even the price of the mobile will go down as mobiles contain electronic components like microprocessors, memory cards etc and excise duty has been fully waived for electronic components. The only problem for the common man will be caused by the fact that though the prices of the PCs and other imported electronic gadgets like mobile phones will go down the prices of computer peripherals may rise because of the additional 2 per cent education cess. Notwithstanding all that, the prices of PCs and electronic goods will come down and it will be easier to buy a PC now. *On the 12th of July, Monday, the government announced that all the anomalies arising out of the excise exemption of PCs will be rectified soon.
Impact of the budget on IT
Chirag Kasbekar Even though the finance minister barely had anything to say about IT in his Budget speech, the IT industry has pretty much got what it wanted: broadly, a continuation of existing policies, a thrust towards better infrastructure and more attention to education.
When the new government came to power, Kiran Karnik, president of the National Association of Software and Service Companies (NASSCOM)) had said, "The most important point in terms of priorities for this government is to make sure they don't do anything negative".
NASSCOM should be happy, and they are. Even though not much in the budget has been targeted at the IT sector, some of the major areas of the economy that the IT industry depends on - infrastructure, technical and general education, scientific and technological research, telecom, government spending - have been given added attention. The industry also wanted a stable regulatory environment and this budget has provided it
While the Indian IT industry scores highly on skill and cost-effectiveness, poor infrastructure - especially power and telecom - pulls it down. This is why NASSCOM has been pressing hard for more to be done to modernise India's infrastructure.
The finance minister has announced a substantial package for infrastructure development, even though many in the industry had hoped for more. This includes the creation of a Rs 40,000-crore corpus for infrastructure project finance and the establishment of an inter-institutional group consisting of seven banks and financial institutions for the funding and implementation of infrastructure projects.
While funds have been allocated, it remains to be seen how they are used. The budget was economical with details.
The key resource of the IT industry is knowledge. It will thrive if the society it is situated in can provide it with a steady stream of well-trained and skilled professionals and also a general populace that is educated enough to find a need for IT. The Budget gave the industry enough to cheer on this front: a 2 per cent cess on all taxes has been introduced to finance education, especially rural education; around 500 Industrial Training Institutes (ITIs) will be upgraded over the next five years in order to improve access to vocational education; and sops have been offered to those seeking loans for higher education.
Spending on science and technology has also been augmented.
Again, the devil is in the details.
As for telecom, the raising of the FDI limit to 49 per cent and the exemption of mobile switching centres from import duty, it is hoped, will bring in more investment and reduce the cost of telecom equipment.
The setting up of an Investment Commission is also likely to boost investment in telecom and IT.
India has one of the lowest PC-penetration rates in the world (only 5 per cent). For something to be done about this, the industry had wanted computers to be exempt from customs and excise duties. The FM has given in to one of those demands: computers will now be exempt from excise. This will also help Indian software and service companies looking to replace old computers lower their costs.
Materials used in the manufacture of components like cathode ray tubes (CRT) have been exempt from duty. The industry is disappointed, however, that imports of newer technology like LCD panels are being levied a higher duty.
The focus on rural development also holds some promise for the IT sector if some of the extra money being poured into agriculture and rural development is spent on using technological solutions to rural problems. According to a NASSCOM report, the government accounted for 9 per cent of total IT spending in India in 2002. This is estimated to go up to 15 per cent over the next five years.
Kiran Karnik, president, NASSCOM realises this, "At the broader level, we will be happy to join hands with the government in leveraging technology as a tool for transformation. Information technology can play an important role in promoting agri-businesses as well as making food stamps a reality by ensuring efficiency and transparency. We suggest a similar entitlement based system for education too."
In a pre-budget assessment, Karnik had suggested setting up a special IT fund for boosting the rural economy: "We see great scope for accelerating (rural) growth by using IT for a range of applications including supply chain management, optimisation of irrigation water releases, expert advise on farm practices, information on power availability, weather and market prices, details about loans and government schemes, and so on."
But the FM wasn't explicit on what the government's policy will be on the use of IT in rural development.
One initiative that could have a big impact on small and medium-sized (SME) IT companies is Indonext - an alternative national trading platform proposed to help SMEs raise equity and debt from the capital market. SME companies currently find it very difficult to raise capital from the market because of the high net worth criterion and have to rely on venture capital and financial institutions.
Another announcement that could have a positive impact on the industry is a soon-to-be-introduced bill on special regulation for the special economic zones (SEZs).
The industry was also happy with the general push towards greater foreign direct investment.
There are, however, a few provisions and omissions in the budget that may not have a wholly positive impact on the sector.
The expansion of the service tax net, the increase of the service tax (to 10 per cent) and the 2 per cent cess on all taxes were something the industry had come to expect and has accepted as necessary.
The industry was disappointed, however, that there was not much movement on issues like legal system reform, tax reform, resolution of taxation issues in the BPO sector and solving the procedural problems that plague the system.
All in all, the budget should have a positive impact on the IT sector (or at least not a negative one) even though, as always, it remains to be seen how the funds allocated are used and policies announced are implemented. Impact of Budget 2004 on software and software services sector
Mohini Bhatnagar The IT and IT services sector has largely been left untouched by the Budget 2004. The 8 percent excise duty on computers has been removed and the sector is bound to benefit from this. PC prices will go down by at least Rs 4,000 to Rs 5,000, which would help increase computer penetration levels stuck at a 5 percent at present. Another positive is the continuance of the zero percent tax regime on software exports. Under Section 10A/B, software exporters are exempt from paying tax till '09. The finance minister has also announced that a bill for regulating Special Economic Zones will be introduced. This augurs well for the software sector.
Despite the Indian IT sector's obvious cost advantages it suffers heavily from poor telecom infrastructure. The setting up of an Investment Commission to facilitate investments in high technology and raising FDI limit in the telecom sector will benefit the industry in a major way.
There are a great number of things that will impact the IT sector negatively as well first and foremost being the imposition of 10 percent service tax on computer maintenance and consultancy services in addition to an education cess of 2 percent. This will adversely affect companies like CMC, Wipro, IBM and a number of others.
Pre-budget wish list of the National Association of Software Service Companies (Nasscom);
1. Take proactive steps to resolve various issues related to direct and indirect taxes
2. Exempt computers from customs and excise duties
3. 100 percent annual deprecation on PCs
4. Advancing target dates by one year for reducing import duties on IT products to 10 percent in 2004 and zero by 2005.
5. Take a fresh look at issues like taxation of non-residents
6. Rising uncertainty and lack of transparency in the case of various incentives and exemptions being provided to the IT software sector.
7. Looking after supportive infrastructure such as improved telecommunication facilities, efficient airports and ports, reliable power supply, efficient urban mass transport and good roads to retain India's global edge in the IT and ITES sector.
8. Creation of Special Economic Zone (SEZ) scheme for educational institutions that would provide incentives and facilities to educational entities in the line of incentives offered to units operating under the Software Technology Park (STP) scheme. Reactions to the Union Budget from some captains of the IT industry
Kiran Karnik, president Nasscom welcomed the overall thrust of the union budget and said it is a positive and growth-oriented budget. "We are happy with the focus on infrastructure and education, as also the positive signals to the telecom industry. All these are of critical importance to the IT industry. We welcome the exemption of excise duty on computers. This move by the government will further enhance and provide a strong stimulus to computer penetration in the domestic market.
At the broader level, we will be happy to join hands with the government in leveraging technology as a tool for transformation. IT can play an important role in promoting agri-businesses as well as making food stamps a reality by ensuring efficiency and transparency. We suggest a similar entitlement based system for education too."
Nasscom also welcomes the government's thrust on airports and power sectors. Karnik said, "An increase in the foreign direct investment (FDI) limit in the telecom and civil aviation sector to 74 per cent and 49 per cent respectively, will not only bring new investments and improve the infrastructure but also ensure that India continues to maintain its competitive edge. The upgradation of 500 ITIs over the next five years will also ensure adequate supply of talent pool for the technology sector." However, the Union Budget failed to address many of the issues outlined in Nasscom's wish list. These include advancement to zero duty regime from '05 to '04, 100 percent depreciation on PCs to increase computer penetration, granting special economic zones for educational institutions catering to the export market and resolving issues related to direct and indirect taxes that are bothering the software services export sector. Ramalingam Raju, CEO and MD Satyam Computers, The general impression on the budget is positive and the Finance Minister has done a fine balancing act.
We are quite pleased with the finance minister's focus on infrastructure development in the areas of power, civil aviation, local mass transportation, roads etc. The emphasis given on education is also laudable. Measures taken to increase FDI in select sectors are quite welcome. So is the abolition of tax on long-term capital gains and reduction in taxation of short-term capital gains.
However, some initiatives that could have allowed for greater participation of the industry in the areas relating to corporate social responsibility would've been welcome.
He said the IT Sector being India 's top exporter with $ 12.5 bn registering a 30 percent growth over last year's was anyways on a roll. The government's focus should give the sector that extra boost and hasten its take-off.
It is envisaged that there would be a reduction in telecom costs that would surely benefit our industry.
The removal of excise duty on PCs would lead to greater penetration of IT in the country across rural and urban areas thus fostering higher IT literacy.
Some statements/initiatives in the areas of soft infrastructure covering IP protection, privacy laws and data protection would have instilled additional confidence for global customers, which would add to the existing positive sentiment to do business in India. Bhaskar Pramanik, MD Sun Microsystems, Two key messages came out of the FM's speech;
1. Reforms will continue, in fact are likely to be accelerated and are going to be more broadbased.
2. GDP of 7-8 percent cannot be achieved unless there is a continuous and sustained focus on agriculture. On the whole given the constraints of fiscal policy a very balanced budget.
For IT Industry the increase in FDI limits in finance, telecom and insurance should give an added impetus as all these industries are high consumers of IT. The focus on infrastructure especially Roads, Transport, Ports, Power and Hotels will also give an added fillip as these impact the Indian IT industry especially ITES.
The increase in spending in education especially technical institutes like ITI will provide much needed manpower skills for the IT and high tech Industry.
Introduction of VAT by 2005 will provide tremendous relief and uniformity of Taxation across the country. The reduction in excise duty on computers to 0 percent is welcome. It will continue to bring down the cost of computing. Also welcome is the implied assertion that as duties are reduced to ASEAN levels by April 2005, the IT industry can expect zero customs duties by April next year.
The only negative is the increase in Taxes by 2 percent as an education cess and the increase in service tax by 2 percent. However, the long-term benefits of the positive aspects of the Budget will hopefully make up for this additional burden on the individuals and the corporates.
W. S. Mukund, managing director, Acer India, This is a very different and extremely positive budget. The priorities of some of the core necessities, which will be essential for the achievement of Vision 2015, have been extremely well spelt out. The availability of credit in the rural, banking / cooperative sector will boost demand for all products including ours. The decision to upgrade 500 ITIs at 100 ITIs every year will create new technology for all IT products such as computers and create a more empowered workforce for tomorrow.
The housing of an international container terminal at Kochi will benefit companies like ours, as it will offer quicker turnaround and more economical logistics for our products.
The reinforcement of the decision to impose VAT from April 2005 is a welcome decision; it will need a strong IT backbone. The raising of FDI cap in the telecom and insurance segments specifically will definitely lead to growth in these segments, both of which are traditionally Acer's strong customer base.
Considering that the government is set to adhere to the April 1, 2005 decision to abolish customs duty on all IT related imports, the decision now to abolish excise duty is definitely a healthy sign to encourage local manufacturing. However, the impact on end user price points cannot be commented upon yet, as we await clarification on cenvat credit on account of counter veiling duty paid for imports of components.
R Ramaraj, managing director & CEO, Sify
Increase in foreign direct investment (FDI) in the telecom sector is a welcome step and will contribute to growth and development of the industry. Exemption of excise duty for personal computers is in the right direction. However, the industry would welcome import duties being decreased for computers and other access devices, to bring their prices down.
The continuation of service tax and its increase from 8 per cent to 10 per cent, especially for the cyber café industry where even 8 per cent is counterproductive, is a retrograde step. Increasing the service tax to 10 per cent and not doing enough to
bring down the prices of access devices like personal computers will result in decrease in number of Internet users rather than encourage them.
Overall a good maiden budget, but I hope the finance minister will look into removing service tax completely for the cyber café industry. Arun Jain, CMD and CEO, Polaris Software Lab
This is a positive budget. It aims at triggering growth in key sectors like food and agriculture. Indirectly, this will help the manufacturing sector too over the next few years. For the IT sector, we have no complaints. In fact, we welcome the abolishing of excise duty on computers. This will make Indian industry automate faster and will, therefore, enhance our efficiencies in business several-fold. The cess of two percent for education on all taxes is definitely understandable and is in the larger national interest. Nandan Nilekeni, CEO, and MD, Infosys, however felt that the Budget lacked focus on infrastructure. He said the IT industry demands in infrastructure, roads and uninterrupted power have not been addressed. Suresh Senapaty, CFO and corporate executive vice president (finance), Wipro, said that doing away with excise duty on computers would spur demand and help improve IT literacy in the country. "The increase in sectoral caps for FDI in telecom, insurance and civil aviation are on expected lines coupled with the continuing focus on selective disinvestment is a welcome sign and will encourage flow of foreign capital," he said. N Lakshmi Narayanan, CEO and president, Cognizant, said, "No major changes have been announced for the IT industry, and as such, we feel it's a good Budget for the industry." FMCG companies should not have much to complain about from the Budget of 2004. Except for the 2 percent education cess, which applies to all companies by and large there is good news for FMCG players. The FMCG industry has been seeing a downturn for the last couple of years owing to increasing competition both from domestically produced goods and FMCG imports.
The proposals of Budget 2004 may go some way to bring cheer to the FMCG sector. Among the negatives for FMCG players in the Budget 2004 is the 20 percent dividend distribution tax on debt funds. This is likely to adversely affect companies like Britannia, Nestle and HLL who have a large chunk of their investment folio in debt funds
Palm oil
Mohini Bhatnagar Protection to the domestic palm oil industry has been granted by imposing a customs duty of 75 percent on imports of palm oil. This will definitely benefit the domestic palm oil industry. Experts opine that chances of domestic companies increasing palm oil prices are low as there is intense competition in the industry on account of a large number of palm oil refining units. They say that at the outset there could be a marginal 5 percent increase in prices. The impact on consumers will be marginal. Dairy
Mohini Bhatnagar The dairy sector stands to gain from the budget proposals as excise duty on dairy machinery has been reduced from 16 percent to nil. This will benefit companies like Amul, Nestle and to a lesser extent Britannia, which does not have as big a presence in dairy products. Tea and coffee
Mohini Bhatnagar
The customs duty on tea and coffee plantation machinery has been reduced to 5 percent from 20 percent earlier. This should benefit tea and coffee majors like HLL, Nestle and Duncans group. The packaged tea industry has been facing stiff competition from the small and unorganized tea sector.
Processed meat, poultry and fish
Mohini Bhatnagar Measures such as halving of excise duty on processed meat, poultry and fish to 8 percent will help companies like Godrej, who have recently entered the frozen foods sector and other small players in the sector.
Edible oil
Mohini Bhatnagar
Edible oil players like Agrotech Foods, Marico Industries, Adani Wilmar among others should gain marginally from the halving of excise duty on food grade hexane (used in edible oils) to 16 percent. Education cess and service tax the animals to fear
Venkatachari Jagannathan However hard the finance minister P Chidambaram and the finance ministry officials try to convince that the 2004-05 budget proposals-imposition of 2 per cent education cess, increase/expansion of service tax ambit and the increase in excise duty on steel- are not inflationary, the reality seems otherwise. The first proof is the country's largest car maker Maurti Udyog Limited. Even before the budgetary proposals are made into a law, the car company has increased the prices of some of its models and shifted the blame on the proposed 2 per cent education cess to be levied on all indirect taxes. The company has announced a price increase of 0.38 per cent across all the models - ex-showroom, Delhi. And it is just a matter of time for steel users to jack up the prices of their products citing the increase in excise duty on the metal. However they should remember the finance minister's logic in revising the duty on steel. The move to increase the excise duty seems to be one of retribution. In his budget speech he said, " In February this year, excise duty on steel was reduced from 16 per cent to 8 per cent, but with the caveat that the decision will be reviewed when the regular budget is presented. Belying expectations, steel prices have not moderated but have risen sharply." As a consequence while reducing the customs duty on non alloy steel by 5 per cent to 10 per cent, the finance minister increased the excise duty on steel to 16 per cent. The tenor of the finance minister's speech should be taken note by the tractor and the computer manufacturers, as one of the budget proposals is to abolish the excise duty on these industries. An official of a leading tractor company in his budget reaction stated that the manufacturers would have to see whether the excise abolition would really result in savings. According to him, the production inputs carries 16 per cent excise duty and if the duty exceeds 12 per cent, the benefit of removal of the excise on the final product would be more than neutralized by the loss of cenvat credit on inputs. A similar view is expressed by Acer India (Pvt) Limited's managing director W. S. Mukund, "The decision now to abolish excise duty is definitely a healthy sign to encourage local manufacturing. However, the impact on end user price points cannot be commented upon yet, as we await clarification on cenvat credit on account of counter veiling duty paid for imports of components." According to R Ramaraj, managing director and ceo, Sify Limited, "The continuation of service tax and its increase from 8 per cent to 10 per cent, especially for the cyber café industry where even 8 per cent is counterproductive, is a retrograde step. Increasing the service tax to 10 per cent and not doing enough to bring down the prices of access devices like personal computers will result in decrease in number of Internet users rather than encourage them." All other manufacturers and service providers will soon follow Maruti's route blaming the new cess and increase in service tax. Meanwhile the service tax dragnet first levied in telecom has now expanded to every kind of service. With his budget proposal, Chidambaram has decided to net banking services like issuance of demand draft, pay orders etc. It seems the day is not far away when banks will start levying service tax on deposit acceptance. But is not the central government preempting the state governments from levying the service tax on small players like pandal/shamiana contractors, hair stylists etc? Further, are not the state and municipal governments better placed to impose and collect the tax rather than the central government? Answering that question Vineeta Rai, secretary, Revenue, central government said, "The service tax is a central tax. The tax collected is shared with the states. The existing tax machinery can effectively collect the same. However the education cess will not be shared with the states." However the Tamil Nadu chief minister J Jayalalithaa has strongly voiced her opposition to the centre taking over the powers to tax services. Similarly the finance minister's announcement to set up a Backward States Grant Commission has attracted her ire. According to Jayalalithaa, the move undermines the basic fabric of the centre-state fiscal relations envisaged in the Constitution.
Implications for the debt market
Nandkumar Surti The finance minister reiterated the commitment to fiscal reform and stated that the government was committed to do away with revenue deficit by 2008-09. The fiscal deficit for the year 2004-05 is budgeted at 4.4% of GDP. In absolute terms, the fiscal deficit has increased by Rs 955 crore over the interim budget estimates. Inflation, as stated earlier, was projected to be 5% percent by financial year-end. The average inflation for the year was estimated to be in the range of 4.0-5.0 percent, which seems to be on the lower side going by the higher inflation numbers for the year announced so far. The fiscal deficit at 4.4 percent of estimated GDP for FY05 augurs well for the bond market. However the introduction of a turnover tax in transactions is a significant negative. Though finance ministry officials have clarified that the term securities includes bonds and shares, there is considerable uncertainty regarding the applicability of the term. In case the tax is applicable to bonds, it would imply a tax of Rs 75,000 on a transaction of Rs 5 crore which is the minimum trade size. 15 paise of tax on every Rs 100 would effectively stall the debt market turnover where the trades are generally executed on an underlying gain of 5-15 paise. On the whole, we believe that the budget is extremely positive for bonds. However, the introduction of a turnover tax, if applicable, is expected to severely impact the secondary market liquidity in bonds. The process of fiscal consolidation is expected to result in lower yields in case this issue is resolved favourably. Budget impact on the automobile sector
Mohini
High on rhetoric and heavily dependent on implementation efforts, the good parts of the budget are the increase in FDI limits in insurance, (26 percent to 49 percent) telecom (49 percent to 74 percent) and civil aviation (24 percent to 49 percent) that show a willingness on the part of the government to carry on the reforms process.
There is heavy emphasis on agricultural (much required) reforms, increase in agricultural credit and schemes to benefit the urban and rural poor as well as irrigation schemes but there is a question mark on how much of it can be or will be implemented.
The automobile industry, which is considered in many countries to be the mother of all industries and an engine of growth for an economy, in the budget of 2004 does not seem to have very many things to cheer about but carmakers can heave a sigh of relief that things could have been worse. The persistent demand of carmakers to cut excise duties to 16 percent from 24 percent has been ignored. There is status quo on peak customs duty as well as it stays at 25 percent. Carmakers will not be able to cut automobile prices and will do so only at the cost of squeezing their own margins. Passenger car prices are unlikely to see a meltdown. Duties on tractors have been removed. This is consistent with the budget's accent on agriculture and rural India. The tractor industry grew by 10 percent in 2004 after three years of poor performance. The removal of excise will make tractors cheaper and will benefit the farming community as a whole. The long-term picture is impressive in light of poor mechanisation levels in the country.
The continued emphasis on infrastructure, road building and port building, a continuation of last year's budget, is bound to have a salubrious effect on the auto industry. The major cheer for auto companies is that they will be able to avail of tax benefit of 150 percent weighted deduction for investment made in R&D facilities up from the earlier 125 percent.
The current policy allows weighted tax deduction under I.T. Act, 1961 for sponsored research and in-house R&D expenditure for auto companies.
Two-wheeler companies have been clamouring for this write off on the lines of those given to the IT and pharma sectors. Their argument was that, "In the manufacturing sector, apart from pharma, only the automotive sector undertakes R&D. IT and pharma sectors get tax benefits under Sec 35 (2 a and b). This should be extended to the automotive sector as well." The hike in excise duty on steel from 8 percent to 12 percent is bad news. Sooner or later carmakers will pass on part or whole of this to consumers leading to a hike in car prices.
The automotive sector is highly reliant on the small-scale industrial sector for components. The good news is more SSIs have been dereserved but as yet have not been detailed. This may result in greater access of capital and technology. If SSIs are able to increase productivity, auto majors also tend to benefit in a large way, both from better quality and lower costs.
While the ambit of service tax has been widened to include a number of services truck owners and truck operators have been left out providing relief to transporters.
The auto industry grew by nearly 30 percent last year and its growth this year will depend on growth in the overall economy as well as on policy changes. The recent hike in the price of petrol and diesel (though essential) was not good for the sector.
The best part of the 2004-05 Budget is that it pertains to the next six months only after which we could look forward to another one of Mr Chidambaram's dream budget.
Insurance at a premium
Venkatachari Jagannathan Even though the United Progressive Alliance (UPA) government professes to be different from the previous National Democratic Alliance (NDA) government on economic matters, finance minister P Chidambaram seems to have followed the footsteps of one of his predecessors Yashwant Sinha. This is in respect of levying service tax on life insurance premium. While Sinha failed in his attempts, Chidambaram is more likely to succeed with his budget proposal to charge 10 per cent service tax on life insurance premium, double that of what Sinha proposed earlier. Further, he has favoured the corporate sector by linking the tax with excise duty, thereby bringing the cost of corporate insurance down. In 2002 when Sinha proposed to levy 5 per cent service tax on life insurance premium life insurers expressed serious apprehensions about its likely impact on the nascent industry. Further, it was not clear whether the tax rate was to be applied on the total premium (fresh and renewal included) or on the risk/mortality component alone. As a result Sinha dropped the proposal. While it is still not clear whether the tax will be levied on the first year premium or even on the renewal premium, what is clear is that the rate will be applicable on the risk/mortality component alone. It should be noted that the premium paid by a policyholder has several components like contribution to mortality, savings and insurer overheads. Curiously Chidambaram has sugar coated his tax proposal. He has proposed increasing the foreign direct investment (FDI) limit in the insurance sector to 49 per cent from 26 per cent allowed at the time of opening up the sector four years ago. Secondly, he has scrapped the popular Varishtha Pension Bima Yojana scheme for senior citizens administered by the government owned Life Insurance Corporation of India (LIC). Simply put, Varishtha Pension is a pension scheme offering 9 per cent interest return for life of the investor. The government compensated LIC for any short fall in the investment returns on monies collected under the Varishtha Pension scheme. During 2003-04 LIC had mobilised Rs6,070 crore under the scheme. The government seems to be moving away from the pension for senior citizens. The new scheme announced by the finance minister seems to be like any other government savings scheme with a lock-in period of 5 years. The interest rate is fixed at 9 per cent and it is not clear whether the government guarantees the same for the life of the investor or for the lock-in period alone. Further the new scheme is only for people over 60 years of age whereas Varishtha Pension was for people over 55. Sugar coated pill While the private insurers in general - life and non life- have welcomed the hike in the equity limit, the life insurers have expressed their unhappiness about the levy of service tax and unattractive tax concession when it came to pension products. However they remain silent on the government's change of heart on the Varishta Pension scheme as they had demanded its scrapping or allow them to participate in the scheme. Speaking about the hike in FDI cap Anuroop `Tony' Singh, CEO and managing director, Max New York Life Insurance Company Limited says, "The rise in equity cap to 49 per cent is bound to fuel the life insurance industry's growth in the country." In the same vein he adds, "The proposal to enhance the service tax rate from 8 per cent to 10.2 per cent (including the 2 per cent education cess) is a detrimental step for the life insurance industry." According to him, the tax is an unexpected burden and it goes against the basic tenets of life insurance, which people buy to provide protection to their families. Adds Sam Ghosh, country manager Allianz and CEO Allianz Bajaj Life Insurance Company Limited, "The tax hike penalises genuine life insurance and skews it towards savings-oriented life insurance. And in a country like India, where social security options are non-existent, imposing service tax can severely impair the ability of the industry to grow." He is joined by Shika Sharma, CEO and managing director, ICICI Prudential Life Insurance Company Limited in voicing the difficulties to be faced by the life insurers in arriving at the tax liability. "It will be administratively difficult to estimate the base for taxation, as the proportion of premium towards pure insurance cover would not be the same for different products and consumers of different ages." Adds Ghosh, "The budget proposal will put a burden on our management information systems (MIS), as now they will have to bifurcate the premium components accordingly." According to R Ramakrishnan, a consulting actuary, the proposed tax will make the term assurance plans costlier by 10 per cent. On the whole the cost ratio for the insurers will go up by 1.5 per cent. It is going to be a triple whammy for the insurers more so in the case of private players selling group/individual term assurance policies. The group term assurance policies are targeted at the cost conscious corporate sector. The proposed tax will make the term assurance dearer by nearly 10 per cent. It is as if increasing the mortality table by that percentage. The tax impact will not be great on unit-linked policies as the risk component in the premium is very low. Currently the insurers are meeting the service tax liability of their agents. And this amount is all set to go up by 2 per cent. Similarly life insurers are not happy with finance minister's other proposals. While welcoming the government's decision to pass the Pension Funds Regulatory Development Authority the insurers are not enthusiastic about the tax breaks for pensions. Remarks Sharma, "The world over, pensions have been driven by tax exemptions. It is only such measures that will encourage the majority of people, who have no secure savings for their retirement, to build a substantial retirement kitty. The current limit of Rs 10,000 under Sec 80 CCC (1) of the Income Tax Act is inadequate to build a reasonable retirement kitty and we were hoping that the government this year would increase the limit to boost retirement savings." "The insurance regulator and the private insurers both have proposed that the exemption on pension savings be hiked to Rs.40,000," adds Max New York's Singh. According to him, there is huge overlap in pension and life insurance products and those synergies should be ably harnessed. "All life insurance companies should be allowed to participate in pensions." While Sharma praises the finance minister for providing stability in the tax regime- barring the new 2 per cent education cess- insurers are not a happy lot. In a sliding investment returns climate the government's turnover tax on investments has naturally irked the insurers. The proposed tax would pull down further the yield on investments. "The 0.15 per cent turnover tax on investment will be a burden on the cost of management of investible funds," says Ghosh. The turn over tax will impact mostly the private insurers as they are focused in selling the unit linked insurance schemes. The tax will increase their cost ratio further. Singh requests the government to introduce longer term central government bond to support annuities, of up to 50 years tenure. "Existing assets are shorter term (15 years or less) and therefore it is not possible to accurately price annuities," he adds. The non life insurers too are not much perturbed by the 2 per cent increase in the service tax. While the tax might irk the individual clients, corporates can set off the tax against excise duty paid, says Kamesh Goyal, CEO, Bajaj Allianz General Insurance Company Limited. PSUs to spread health insurance concept amongst poor In an attempt to make healthcare accessible to people below the poverty line, the finance minister has announced the redrawing of the Universal Health Insurance Scheme sold by the four government owned non life insurers. According to the government only 11,408 families below the poverty line have been covered under the scheme, which is skewed towards non poor. Under the new scheme announced by the finance minister, the revised premium rates would be, Rs165 for individuals, Rs248 (for a family of five) and Rs330 (family of seven). In order to offset the premium reduction, the government has proposed to increase the premium subsidy and the total amount comes to Rs40 crore. The government hopes to cover around 10 lakh people under the revised scheme. This apart, to spread the concept of health insurance, a new group health insurance scheme has been announced to cover the members of self help groups and other credit linked groups. The four government owned insurers will administer the scheme. The premium under the scheme is fixed at Rs120 and the value of insurance is Rs10,000. Telecom
The budget for the year 2004-05 brought cheers to the telecom industry as it proposed a hike in foreign direct investment in the telecom sector as it will increase the penetration of telecom in the country and also bring in active mergers and acquisition activity in the country. Finance minister P Chidambaram today proposed a hike in sectoral caps in telecommunications, civil aviation and insurance keeping pace with the rapid changes in these areas. In telecommunications, the existing cap of 49 per cent will be hiked to 74 per cent, he said in his budget speech. "The hike in the FDI in telecom is well appreciated. This will prove to be a boon for the growing telecom market and create India as the largest telecom markets in the world in the times to come. Increase in FDI limit to 74 per cent will also fuel the consolidation process in the telecom industry and lead to the long-term players providing better quality services and absolute value to the consumer. It also makes the Indian market an attractive destination for investment to foreign investors," Sudhir Mathur, chief financial officer, IDEA Cellular Ltd. According to the proposed budget, the telecom sector is the biggest gainer in the 2004-05 budget as it has gained on two counts - the sectoral cap has been hiked and also Section 80 I A has been extended till March 31, 2005. "This (hike in FDI limits in telecom) is the most positive thing in this budget - both from the corporate angle as well as the capital market. Now more funds will come into the sector and the telecom industry needs fund to grow," a senior merchant banking official said. The FDI hike in telecom sector will prove to be beneficial for Bharti Tele-Ventures, Hutchison Max Telecom and IDEA Cellular as all the three telcos are looking for greater infusion of funds through the FDI route. "The hike in FDI will give a major boost to the telecom sector. Telecom is a highly capital intensive sector and by removing the cap on investment the finance minister has removed a major hurdle in the expansion on the Indian telecom companies. Telecom service companies can now access foreign capital markets to serve the hinterland in a more efficient and cost effective manner thereby bringing affordable telecom services to one and all," Mr Sunil Bharti Mittal, chairman and managing director, BTVL, said. According to telecom analysts, Hutchison Telecom will now have two options - to improve Hutch's shareholding and to induct financial institutions and others in dollar terms so that there can be a a GDR as well as ADR issue. In the case of IDEA Cellular, STT-Malaysia Telecom combined entity, which has recently taken over Cingular's 33 per cent stake in IDEA, will now have the option to buy out Birla's and Tata's stake too.
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