Budget Bonanza

Finance Minister Pranab Mukherjee, presenting the federal Budget for next year today, said that the Indian economy has weathered the slowdown well. He said the Indian economy was facing grave uncertainty when interim and full Budget for 2009-10 were presented when growth had started decelerating due to the global slowdown.

Today, he said the challenges include consolidating growth and making it inclusive, and to remove the bottlenecks in the public delivery mechanism, which add to inflationary pressures significantly.

The minister outlined some of the measures that he is targetting, or have been carried out:

The FM has made the taxman loosen his grip a little on income tax payers pockets and to an extent gave them something that they were coveting - tax slabs have been raised at  two levels for the next financial year. While retaining the basic threshold limit applicable for income tax exemption at Rs 1.60 lakh, a new proposal says that now 10 per cent tax will be levied between Rs 1,60,001 and Rs 5,00,000  (earlier it was Rs 1.6 lakh to Rs 3 lakh), and 20 per cent on incomes between Rs 5,00,001 and Rs 8,00,000  (earlier its was Rs 3 lakh to Rs 5 lakh) and 30 per cent above Rs 8,00,000  (earlier its was Rs 5+ lakh).

Current income tax slabs and rates are 10 per cent for an income that is between Rs 1,60,001 and Rs 3,00,000, 20 per cent for income between Rs 3,00,001 and Rs 5,00,000 and 30 per cent for income above Rs 5,00,001.

The slabs applicable to women and senior citizens have been altered in the same proportion.

K. Ramachandran, Karvy Private Wealth, explained, “The reduction of tax rates will definitely put more money in the hands of individual tax payers. An individual earning over Rs 8 Lakhs taxable income will save Rs 50,000 on tax. While this will definitely give a fillip to consumption, it is not likely to have any meaningful impact on the prospects for wealth management.”

One more sop for tax payers included the raising of the existing limit of Rs 1,00,000 on tax savings (80C) by Rs 20,000 (this would be for investments in long-term infrastructure bonds).

Government servants received extra attention as their contributions to Central Government Health Scheme (CGHS) can now be used for deductions (within the overall ceiling for tax rebate).

Prashant Khatore , Partner Tax Practice, Ernst & Young added, "Reduction in over all income tax slabs for individuals and 30 percent levy on income exceeding INR 8 lakhs will definitely result in ensuring higher purchasing power in the hands of consumer and consequently increasing the demand for consumer goods.  From a corporate perspective, reduction in surcharge from 10 percent to 7.5 percent will result in higher disposable cash in the hands of corporates and will help in fuelling expansion/ reduced prices of goods. However, increase in MAT rate from 15 percent to 18 percent will act a dampener for the companies which are still falling under MAT regime. Enhancing the exemption limit for tax audit and presumptive taxation under section 44AD from INR 40 lakhs to 60 lakhs for persons carrying on business or profession will help in reducing the compliance cost for small retail players."

Petrol and diesel have been slapped with hikes in customs and excise duties, making the trip to the petrol pump that much more expensive. As a result, petrol and diesel prices will go up by Rs 2.67 a litre and Rs 2.58 per litre (in Delhi) respectively. While the customs duty on petrol and diesel were increased to 7.5 per cent from 2.5 per cent, excise duty was raised by Re 1 a litre to Rs 14.35 and Rs 4.60 per litre respectively.  This caused the opposition parties to protest vehemently as it will worsen the inflation situation. 

The dream SUV has become that much more fictional. Government has hiked excise duty on SUVs to 22 per cent from the current 20 per cent, but that did not affect the scrips of car-makers, which were treading in positive terrain. 

Never mind the rise in the price of gold to unheard of heights (seen at Rs 18,700 per 10 gm during the last two months of 2009), the government is looking to make the trip to the jeweller costlier too. It has proposed a 50 per cent hike in custom duty on precious metals, including gold and silver. The hike is from Rs 200 to Rs 300 per gramme on gold. On silver its is from the current Rs 1,000 to Rs 1,500 per kilo. These hikes will mostly be passed onto purchasers by the retailers.

Khatore explained, “Increase in Customs duty on precious metals will have an impact on the pricing for consumers and will act as a negative.  However, refined serially numbered gold bars made from the ore/concentrate stage will now attract excise duty of Rs.280 per 10 grams (instead of 8% ad valorem) with Cenvat credit facility on inputs and capital goods.”

As was generally expected, but against which corporates had lobbied hard, the government has raised excise duties by 2 per cent to 10 per cent on all non-oil products. These were cut in the fight against the global financial crisis-induced slowdown. This is part of the gradual rollback of stimulus measures and has been done because of the economy being on a stronger growth path. Excise duties were slashed starting December 2008 from 14 per cent in two phases to jump-start a faltering economy.

Khatore elaborated, "Excise duty rate has been increased from 8% to 10%. Accordingly, peak effective Customs duty rate has increased from 24.42% to 26.85%.  However, exemption from Special Additional Duty (‘SAD’) is a key winner in today’s budget and is sure to spread cheer amongst the various stake holders as claiming refund for SAD was posing lot of administrative difficulty."

The step also indicated the start of the roll-back of stimulus measures.

However, service tax, which was slashed from 12 per cent to 10 per cent, again as a slowdown-fighting measure, has not been raised - perhaps the intention is to lay the groundwork for the implementation of the Goods and Services Tax, which is expected to ink these rates in at 10 per cent each.

He underlined the need to move towards fiscal consolidation and that a review of the public spending should be undertaken that would allow India to move towards the path of fiscal consolidation.

He said that moving positively on these will make achieving even 10 per cent growth rate in not too distant a future a real possibility. 

The Direct Taxes Code and the GST are likely to be implemented by April 2011, said the FM.

Highlighting the aspect that is the most worrisome burden on the common man, the FM said Increasing food prices are a matter of concern and will be tackled firmly. He said that high fuel prices had added to inflation. To check it, govt will consult with state Chief Ministers.

Structural changes have been effected in the excise duty on cigarettes, cigars and cigarillos, and some increase in rates. Excise duty on all non-smoking tobacco such as scented tobacco, snuff and chewing tobacco will be enhanced.

Defence expenditure has been hiked from Rs 1,41,703 crore to Rs 1,47,344 crore, which includes capital expenditure of Rs 60,000 crore.

Budget Estimates for 2010-11 indicate gross tax receipts at Rs 7,46,651 crore and the non-tax revenue receipts at Rs 1,48,118 crore.

An increase of 8.6 per cent from previous fiscal has been inked in for total expenditure at Rs 11,08,749 crore - Plan and Non-Plan expenditures are Rs 3,73,092 crore and Rs 7,35,657 crore respectively.

2010-11 fiscal deficit was estimated at 5.5 per cent (adds up to Rs 3,81,408 crore), while the rolling targets for 2011-12 and 2012-13 were seen at 4.8 per cent and 4.1 per cent respectively.

Deepak Kapoor, Managing Director, PricewaterhouseCoopers said, “The emphasis on reducing the combined debt-GDP ratio and fiscal deficit is a good sign of fiscal consolidation. The increased allocation for social sector especially in education, skill development, women and child development and health will strengthen the social infrastructure. Overall the thrust on social sector, rural development and infrastructure will help in inclusive growth”.

Actual net government borrowing in 2010-11 would be to the tune of Rs 3,45,010 crore.

The direct taxes proposal envisages a reduction in the current surcharge of 10 per cent on domestic companies to 7.5 per cent. However, Minimum Alternate Tax (MAT) has been hiked from 15 per cent to 18 per cent of book profits.

Infrastructure will get an allocation of Rs 1.73 lakh crore; thrust will be on rural infrastructure. In fact, 46% of the total plan outlay has been allocated to infrastructure.

Dr. Amarnath Ananthanarayanan, CEO, Bharti AXA General Insurance indicated his disappointment on the insurance sector not receiving adequate attention. He said, “It is disappointing to see that this year too there is nothing significant in the budget for the Insurance Industry. The pan-India annual health checkup and survey of the rural health mission is a good step towards boosting healthcare and will indirectly help the Insurance Industry in building a National repository of data, which will help underwriting and actuaries in pricing of insurance products as well as enable Insurance cover to graduate from simple hospitalisation to comprehensive protection. With the announcements on taxation for the Automobile Industry, the rise in car prices may result in a drop in car sales which could affect our motor insurance sales. Sales of Industrial All Risk policies may see a rise due to the Infrastructure focused benefits announced.”

On Budget day, the start early in the morning  was positive for Sensex, gaining 70 points to 16,323.94 points.   As the FM started speaking in Parliament, Sensex moved up by another 0.4 per cent.

Thereafter the movement retained its positivity, with both Sensex and Nifty moving up  1.97 per cent and 2.02 per cent respectively by 1:45 p.m.

The Budget proposals were cheered by the stock markets today. Sensex  surged 420 points (a high of 16,669 points) at one point, but this was whittled down to just 175.35 points (closing at 16,429.55 points), up by 1.08 per cent at the end of the day due to profit-booking – the next trading day is a long way away due to national holidays and may have been a contributing factor. Markets will open on Tuesday.

While all the sectoral indices closed in the green, IT and FMCG did not.

Nifty closed up by 62.55 points at 4,922.30 points.

Ramachandran  said, “The positive reaction of the markets is more by way of relief that the FM has not gone hammer and tongs after revenue garnering. Also, there has been a positive message coming from the government on its commitment to supporting growth by providing a favourable investment climate. This is by way of providing a roadmap on fiscal deficit management and also keeping the government borrowings under check and avoiding crowding out of commercial borrowings. The FM has indeed bet on growth. By showing economic prudence in the levy of taxes and by creating the ground for a positive investment climate the FM has ensured that economic and industrial growth is not hurt. This will help the growth-led equities market uptrend to be not only sustained but accelerate going forward.” 

  Highlights

Income tax reforms nearly complete

Disinvestment target has been put at Rs 25,000 crore this year

Tax breaks for mobile phones accessories

3G auctions to raise Rs 350 bn in FY11 for govt

Income tax revenue at Rs 1.28 tn

4% inflation seen in FY11

Sees inflation at 4.5% in both FY12 and FY13

Subsidy for petroleum in 2010-11 likely at Rs 31.08 bn

Duty on oil products to be enhanced to 10%

Sees corporate tax revenue for 2010-11 at Rs 3.01 tn

Silver import duty hiked to Rs 1,500 per kg

Imported coal to be levied clean energy cess

9% GDP growth seen in FY13

8.5% GDP growth in FY11

Subsidy to be in cash instead of bonds for fertiliser, oil

Subsidies will be included in fiscal accounting

50 crore skilled workers to be created by 2022

Minority ministry allocated Rs 2,600 crore 

Bharat Nirman allocation at Rs 48,000 crore

MAT has been raised from 15% to 18% 

NREGA allocation raised to Rs 40,100 crore

Rural India to see an investment of 35% of development funds 

Pollution control plan in TN and Goa gets Rs 200 crore

Fiscal deficit targets (revised) for 2009-10 at 6.9%

Fiscal deficit at 5.5%, rolling targets of deficit at 4.8% in 2011-12 and 4.1% in 2012-13

Net market borrowing 2010-11 was at Rs 3,45,010 crore

Rs 1900 crore allocated to UID Authority 

Expected advance tax receipts at Rs 7,46,651 crore; Tax revenue receipts (Net) at Rs 14,118 crore

Plan expenditure increased by 15%  and of non-plan expenditure by 6%

Affordable housing interest subsidy scheme extended by 1% to March 2011

Draft Food Security Bill ready, will be put up for public debate

Solar power of 200,000 MMW by 2022

Financial inclusion fund allocated Rs 100 crore 

Urban development allocation up 75% to Rs 5,400 crore

Healthcare allocation at Rs 22,300 crore 

Rashtriya Krishi Yojna allocated Rs 300 crore 

School education allocation at Rs 31,036 crore; Elementary education at Rs 3,675 crore

Allocation for National Social Security Fund at Rs 1,000 crore

Rs 500 crore for Clean Ganga mission

Rs 200 crore to Goa for restoring beaches

Renewable energy allotment up by 61%

To establish clean energy fund

Bank farm loan target: Rs 3.75 lakh crore

Rs 16,500 cr capital support for PSU banks

Fertiliser subsidy to be reduced

Allocation of coal blocks will be through a new coal regulator

Railways allocation at Rs 16,500 cr

Power allocation funds raised from Rs 2,232 cr to Rs 5,132 crore

Delhi-Mumbai industrial corridor up for development

Road transportation allocation raised to Rs 19,894 crore

Farmers' repayment tenure for loans extended by 6 months to June 30th 2011 

For a green revolution in eastern India, govt has provided Rs 400 crore

Rs 16,500 crore set aside for PSU banks  - to get minimum 8% tier 1 capital by March 2011

FDI into India was $20.9 bn in the April to Dec 2009 period

Additional licenses will be issued by teh RBI to pvt sector banks and non-banking financial institutions

An apex level Financial Stability and Development Council to be set up

Interest subvention of 2% for exports of handlooms, handicrafts and SMEs for 1 year

Credit flow agriculture targets have been met by banks. Target for this year raised to Rs 375,000 crore from Rs 325,000 crore last year

Domestic public debt equity ratio to see cuts

Gradual phasing out of stimulus: FM

Stimulus measures will be gradually phased out 

A new agricultural initiative has been provided with Rs 200 crore spend 

The uncertainty in investors mind was evident yesterday after the presentation of the Economic Survey. The markets charged to early gains in the day, but by the end of the day it ended flat. Clearly, the markets were not enthused by the contents of the Survey – even the prediction of GDP reverting to its +9 per cent growth in 2011-12.

Post-Economic Survey Situation 

In the wake of the recommendations of the Economic Survey markets had ended flat. 

The recommendation of the Survey for a gradual rollback of the stimulus measures, which Indian corporates had been lobbying hard to ensure it is continued, may have had something to do with it. Its rollback may harm the humming current demand for their products.

However, to be fair, most global markets ended in the red yesterday, despite the fact that the US Federal Reserve announced that the record low interest rates will be persevered with.

The strain on government finances has been highlighted by the Economic Survey. While the fiscal deficit is a primary concern, what has been a worry is the timing of the rollback of the fiscal stimulus measures, which may contribute to already-high inflation if not removed in a timely manner. One factor that leans towards an early exit from the stimulus is the broad-based aspect of the recovery.

However, if the stimulus is moved out too early, it may hurt economic growth.

The Survey has pointed out that most of the sizzling growth notched up in the economy has been the direct result of the stimulus money sloshing around the system.

Budget Document Budget Highlights Budget Summary Budget Speech Graphic View (pdf format) Photo Gallery Webcast of Post Budget Press Conference   Releases Proactive Steps in Budget 2010-11 for the Environment  (PIB 26-2-2010 ) 61% Increase in plan outlay for Ministry of New and Renewable Energy  (PIB 26-2-2010 ) Rs.1,73,552 crore for Infrastructure Development  (PIB 26-2-2010 ) Interest Subvention for exports extended for one more year : to benefit handicrafts, carpets , handloom sectors  (PIB 26-2-2010 ) FDI receives equity inflows of us $ 20.9 billion during April-December 2009  (PIB 26-2-2010 ) Rs. 1,114 crore Budgetary Support for Development of Rural Roads in North-Eastern Region and Sikkim  (PIB 26-2-2010 ) Apex Level Financial Stability and Development Council to be set up for maintaining financial stability  (PIB 26-2-2010 ) Rs.1200 crore for Financial Restructuring of NACIL  (PIB 26-2-2010 ) Nutrient Based Subsidy Policy for fertiliser sector to be effective from April 1, 2010  (PIB 26-2-2010 ) Competitive bidding process for allocation of coal blocks  (PIB 26-2-2010 ) Government Expects to introduce Direct Tax Code and GST from April 2011  (PIB 26-2-2010 ) Plan allocation for Power Sector doubled  (PIB 26-2-2010 ) National Social Security Fund for unorganized sector workers set up  (PIB 26-2-2010 ) PSU ownership broad-based in Oil India, NHPC, NTPC and REC  (PIB 26-2-2010 ) Plan Allocation for Ministry of Social Justice and Empowerment enhanced by 80 per cent  (PIB 26-2-2010 ) Additional one per cent interest subvention to farmers  (PIB 26-2-2010 ) 37 Per cent of total plan outlay for 2010-11 earmarked for social sector  (PIB 26-2-2010 ) Rs.66,100 crore provided for Rural Development  (PIB 26-2-2010 ) Government to follow four pronged strategy in agri sector: to promote inclusive growth and enhance rural income  (PIB 26-2-2010 ) Allocation for Rajiv Awas Yojana enhanced to Rs. 1270 crore from last year’s Rs. 150 crore  (PIB 26-2-2010 ) Fiscal deficit pegged at 5.5 per cent  (PIB 26-2-2010 ) Service Tax to be retained at 10%  (PIB 26-2-2010 ) Substantial relief to individual tax payers  (PIB 26-2-2010 ) Indian Rupee to get a symbol, join the select club of currencies  (PIB 26-2-2010 ) Fund corpus for Micro-Finance Development and Equity Fund doubled to Rs. 400 crore  (PIB 26-2-2010 ) New Measures for Strengthening Transparency & Public Accountability  (PIB 26-2-2010 ) Micro-wave ovens, pre-packaged imported goods, mobile phones, watches, readymade garments, toy baloons, long pepper, replaceable household water filters to be cheaper.  (PIB 26-2-2010 ) New tax incentives announced for Infrastructure Sector  (PIB 26-2-2010 ) Uniform basic duty of 5 per cent and cvd of 4 per cent on import of medical equipment  (PIB 26-2-2010 ) Major tax relief to agriculture & related sectors  (PIB 26-2-2010 ) Infotainment sector to benefit from concessional customs duty  (PIB 26-2-2010 ) Rate reduction in Central Excise duties partially rolled back  (PIB 26-2-2010 ) Major concessions for R&D in Scientific and Social Sectors  (PIB 26-2-2010 ) Relief to small businesses and professionals with revised turnover basis for audit of accounts  (PIB 26-2-2010 ) Special duty concessions to promote clean environment  (PIB 26-2-2010 ) Reforms process in tax administration taken forward  (PIB 26-2-2010 )