INTRODUCTION AND OVERVIEW OF THE ECONOMY:
In the fiscal year 2011-12, the Indian economy has encountered an interrupted economic recovery led by the following macro-economic factors:
Gloomy global economy and disturbing political scenario
The Indian economy has experienced turbulence, steered by global factors such as debt crisis in the Euro zone, political turmoil in the MENA region, natural calamity like an earthquake in Japan and ascending Brent crude oil prices (on account of worries of supply contraction occurring from Iran and North Sea (marginal sea of Atlantic Ocean). Thus while the last budget (i.e. Union Budget 2011) did indicate a glimmer of hope, the reality turned to be far different due to the global macro-economic scenario. Quarter-on-quarter (Q-o-Q) GDP growth rate in India dwindled in the last three quarters of the fiscal year 2011-12, and thus now the GDP growth estimate for the present fiscal year (i.e. 2011-12) has been pegged at 6.9% (after having grown at 8.4% in preceding two years).
Sticky WPI inflation and high interest rate regime
Since managing the WPI inflation bug was a major challenge for the Government as well as Reserve Bank of India (RBI), the monetary policy action did cause a slowdown in economic growth; in fact this was clearly indicated by the core sector growth, Index of Industrial Production (IIP), and to some extend the consumption story as well. But now since monetary policy actions have produced result in taming the inflation bug, it is expected that inflation would further moderate in the next few months and remain stable thereafter. Evidence suggests that prolonged periods of high food inflation tend to get generalised; but since steps have been taken to bridge gaps in distribution, storage and marketing systems have helped in more effective management of inflation.
Widening Current Account Deficit
Developments in India's external trade in the first half of current year have been encouraging. During April-January 2011-12, exports grew by 23% to reach U.S. $ 243 billion, while imports at U.S. $391 billion recorded a growth of over 29%. Moreover, it was heartening to see diversification in export and import market being achieved. But a noteworthy point is that with Current Account Deficit (CAD) at 3.6% of GDP for 2011-12, and reduction in net capital inflow in the 2nd and 3rd quarters are putting pressure on exchange rate. Nonetheless, the Government expects CAD to be smaller, aided by improvement in domestic financial savings.
Deterioration in fiscal deficit
As far as fiscal consolidation is concerned, the Government has acknowledged the fact of deterioration in fiscal balance in the present fiscal year, due to slippage in direct tax revenue and increased subsidies. The profit margins came under pressure due to higher interest rates and material costs, which in turn impacted growth in corporate taxes. Furthermore, against the assumption of Brent crude oil being U.S. $ 90 per barrel, in reality accelerated at a far greater pace (and thus now as per Government's estimates for the fiscal year 2011-12 it is likely to exceed U.S. $115), thereby leading to deviation in fiscal consolidation. In fact fiscal deficit has been estimated to be 5.9% for the present fiscal year.
Realisation dawns upon...
But realising the fact that we are now at a juncture where it is necessary to take hard decisions in an attempt to improve our macroeconomic environment and strengthen domestic growth drivers (to sustain high growth in the medium term), the Budget 2012 pronounced for acceleration in pace of reforms and improvement in supply side management of the economy. Finance Minister, Mr Pranab Mukherjee said in his speech, "We are about to enter the first year of the Twelfth Five Year Plan which aims at ‘faster, sustainable and more inclusive growth.' The Plan will be launched with the Budget proposals for 2012-13. In keeping with the stated priorities, I have identified five objectives that we must address effectively in the ensuing fiscal year. These are:
- Focus on domestic demand driven growth recovery;
- Create conditions for rapid revival of high growth in private investment;
- Address supply bottlenecks in agriculture, energy and transport sectors, particularly in coal, power, national highways, railways and civil aviation;
- Intervene decisively to address the problem of malnutrition especially in the 200 high-burden districts; and
- Expedite coordinated implementation of decisions being taken to improve delivery systems, governance, and transparency; and address the problem of black money and corruption in public life."
Hence taking a bird's eye view of the entire economy and keeping in mind the difficult global environment, the growth rate of our country in the fiscal year 2012-13 has been pegged at 7.6% with a variation of +/- 0.25%.
ROAD TO FISCAL CONSOLIDATION:
Moreover, to address to the issue of fiscal consolidation the budget 2012 has proposed introduction of amendments to Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act), whereby the concept of Effective Revenue Deficit" and "Medium Term Expenditure Framework" statement would be the two important features of amendment to FRBM Act in the direction of expenditure reforms.
Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. This will help in reducing consumptive component of revenue deficit and create space for increased capital spending. Medium-term Expenditure Framework" statement will set forth a three-year rolling target for expenditure indicators.
The budget recognises the fact that some subsidies, while being inevitable, may become undesirable if they compromise the macroeconomic fundamentals of economy. Thus the Government has decided that from 2012-13 subsidies related to food and for administering the Food Security Act will be fully provided for, while other subsidies would be funded to the extent that they can be borne by the economy without any adverse implications. It is an Endeavour to keep central subsidies under 2% of GDP in 2012-13 and over next 3 year, to be further brought down to 1.75%of GDP.
While the Direct Tax Code (DTC) was intended to be introduced from April 2012, it deferred on-going work on the same done by the Parliamentary Standing Committee on Finance. Similarly, since drafting of the model legislation for the Centre and State Goods & Services tax (GST) in concert with States is under progress, the same too has been delayed. However, it is expected that the GST network would be set up as a National Information Utility and to become operational by August 2012.
As far as the disinvestment targets are concerned, as against a target of Rs 40,000 crore, the Government will raise about Rs 14,000 crore from disinvestment in the present fiscal year. For the fiscal year 2012-13 the budget 2012 has proposed to raise Rs 30,000 crore through disinvestment, but has decided to retain at least 51% ownership and management control with the Government.
Thus after setting the aforementioned guidance to fiscal consolidation, the budget estimated for the fiscal deficit for the year 2012-13 has been set at 5.1%.
ATTEMPT TO STRENGHTHEN INVESTMENT SCENARIO:
Since the domestic economic scenario has suffered multiple jolts in the past year, the Government recognises that it is time to fast track policy decisions and ensure on-time implementation of major projects.
Foreign Direct Investment
While in the recent past there has been uproar (caused by the oppositions) over increase in multi-brand retail, the budget 2012 proposes for an increase in multi-brand to 51% retail after making efforts to arrive at a broad-based consensus with the state Governments.
We believe that while this proposal is intended to fuel economic growth, by striding consumption story of India, we think that it may face strong opposition from state Governments where the Congress isn't in power. Moreover, as a flip side to increase to in multi-brand retail is a detrimental impact on the unorganised retail sector, there may be uproar from traders in the unorganised segment as well.
Financial Sector Reform
Recognising that reforms in the financial sector is vital for more efficient market intermediation between savers and investors, and to add depth to the capital markets; budget 2012 has proposed to introduce a new scheme named - "Rajiv Gandhi Equity Saving Scheme" (having a 3 year lock-in), which will allow income tax deduction of 50% to new retail investors, who invest upto Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The details of this scheme will be announced by the Government in due course.
We believe that if the aforesaid scheme is well drafted, it will encourage retail investors to participate in the Indian capital market and will add depth to the market. Moreover, tax saving incentive will be a source of encouragement to participate in the said scheme.
Further as a step to deepen the capital markets and to encourage investment in infrastructure sector, the budget 2012 has proposed for:
- Simplification in the process of Initial Public Offerings (IPOs)
- Making mandatory for companies to issue IPOs of Rs 10 crore and above in electronic form through nationwide broker network of stock exchanges
- Providing opportunities for wider shareholder participation in important decisions of the companies through electronic voting facilities
- Allowing Qualified Foreign Investors (QFIs) to access Indian Bond Market
- Permitting two-way fungibility in Indian Depository Receipts subject to a ceiling
Thus we believe the steps are very encouraging and intended to deepen the participation in the Indian equity markets, both by foreign investors as well as Indian investors.
Capitalisation of Banks and Financial Holding Companies
In order to protect the financial health Public Sector Banks (PSBs) and financial institutions, the Government has also proposed to provide a sum of Rs 15,888 crore for capitalisation of PSBs, Regional Rural Banks (RRBs) and other financial institutions including NABARD. Moreover, the Government is also considering a possibility of a creating a financial holding company to raise resources to meet the capital requirements of PSBs s under examination.
Also in order to make the banking payment structure at par with global standards, a comprehensive action plan has been prepared for implementation in 2012-13. A central Know Your Customer (KYC) depository will be developed in 2012-13 to avoid multiplicity of registration and data upkeep.
The Government has moved towards the right path for financial inclusion, as against the 73,000 identified habitations that were to be covered under "Swabhimaan" campaign by March, 2012, about 70,000 habitations have been covered already; and the likely to be covered by March-end. Moreover, as a next step the Government has also set up Ultra Small Branches (USBs) at these habitations. As far as RRBs are concerned the budget 2012 pronounces that out of Out of 82 RRBs in India, 81 have successfully migrated to Core Banking Solutions and have also joined the National Electronic Fund Transfer system. Moreover, it has been proposed to extend the scheme of capitalisation of weak RRBs by another 2 years to enable States to contribute their share.
THE MAJOR FOCUS AREAS FOR THE GOVERNMENT:
- Infrastructure and industrial development - Recognising the fact that adequate infrastructure is a major constraint on our growth; the Government has followed a strategy to increase investment in infrastructure through Public Private Partnerships (PPPs). During the 12th Five Year Plan investment in infrastructure is expected to go up to Rs 50 lakh crore with half of this, expected to be from private sector. Since Viability Gap Funding (VGF) is important instrument to attract PPP, this year budget 2012 has proposed to make irrigation (including dams, channels and embankments), terminal markets, common infrastructure in agriculture markets, soil testing laboratories and capital investment in fertiliser sector eligible for VGF under this scheme. Oil and Gas/LNG storage facilities and oil and gas pipelines, fixed network for telecommunication and telecommunication towers will also be made eligible sectors for VGF.
For the present year tax-free bonds worth Rs 30,000 crore were announced for financing infrastructure projects. This limit is now proposed to be doubled in Budget 2012 to Rs 60,000 crore in the fiscal year 2012-13 (by including Rs10, 000 crore for NHAI, Rs 10,000 crore for IRFC, Rs 10,000 crore for IIFCL, Rs 5,000 crore for HUDCO, Rs 5,000 crore for National Housing Bank, Rs 5,000 crore for SIDBI, Rs 5,000 crore for ports and Rs 10,000 crore for power sector). Similarly, for rural infrastructure development a proposal has also been made for enhancing the allocation under Rural Infrastructure Development Fund (RIDF) from Rs 5,000 at present to to Rs 20,000 crore.
We believe that with the doubling the financing limit for financing infrastructure projects, the markets would witness a host of tax-free bond issues to be launched in the next fiscal year. However, one will carefully have to watch the coupon rates which these bonds would offer as interest rates are likely to fall from the next fiscal year as signaled by the RBI (in its 4th quarter mid-review of monetary policy 2011-12).
For the power and coal sector, the Government has proposed External Commercial Borrowing (ECB) to part finance rupee debt of existing power projects.
- Transportation: Roads and civil aviation - Similarly in order to encourage PPP in road construction projects, the budget 2012 has propose to allow ECB for capital expenditure on the maintenance and operations of toll systems for roads and highways so long as they are a part of the original project.
Also attempting to provide aid to the airline industry (which is facing financial crisis), the Government has already permitted direct import of Aviation Turbine Fuel (ATF) by Indian Carriers. Addressing to immediate financing concerns of the civil aviation sector, the budget 2012 has proposed to permit ECB for working capital requirements of the airline industry for a period of one year, subject to a total ceiling of U.S. $1 billion. Moreover, proposal to allow foreign airlines to participate upto 49% in the equity of an air transport undertaking is under active consideration of the government.
We think that the especially direct import of ATF by the civil airlines industry will help to aid the paining industry. Moreover, since most ECB route has been kept open for working capital financing, it will be of immense help the Indian carriers as most of them are facing working capital management problem.
- Micro, Small and Medium Enterprise (MSME) - In order to enhance availability of equity to MSME sector, the budget has proposed to set up a Rs 5,000 crore India Opportunities Venture Fund (IOVF) with SIDBI.
We believe this proposal will go a long way in helping MSMEs as they construe to be integral to our country's economic progress. They rely primarily on loans from banks and informal sources to raise capital, and the recent launch of two SMEs in Mumbai can help them to access finance.
- Agriculture - The Government has clearly pronounced that Agriculture will continue to be a priority. Thus the plan layout plan outlay for the Department of Agriculture and Cooperation is being increased by 18% from Rs 17,123 crore in 2011-12 to Rs 20,208 crore for the fiscal year 2012-13. Similarly, the outlay for Rashtriya Krishi Vikas Yojana (RKVY) is being increased from Rs 7,860 crore in 2011-12 to Rs 9,217 crore in 2012-13. Initiative of Bringing Green Revolution to Eastern India (BGREI) has resulted in increased production and productivity of paddy. Allocation for the scheme increased to Rs 1,000 crore in 2012-13 (from Rs 400 crore in 2011-12) The budget 2012 has also proposed to allocate Rs 300 crore to Vidarbha Intensified Irrigation Development Programme, which seeks to bring more farming areas under protective irrigation.
As far as the agriculture credit is concerned, the target has been raised by Rs 1,00,000 crore to Rs 5,75,000 crore in 2012-13. Interest subvention scheme for providing short term crop loans to farmers at 7% interest per annum to be continued in 2012-13. Additional subvention of 3% will available for prompt paying farmers. Moreover, in order to enhance the capacity of RRBs to disburse short term crop loans to small and marginal farmers short-term RRB credit refinance fund is set up, and allocation of Rs 10,000 crore to NABARD for refinancing the RRBs through this fund is proposed.
Since Kisan Credit Card (KCC) is an effective instrument for making agricultural credit available to the farmers, KCC scheme is proposed to be modified to make KCC a smart card which could be used at ATMs.
For encouraging agriculture research a sum of Rs 200 crore, is set aside for incentivizing research with rewards.
To maximise flow of benefit from investments in irrigation projects, Structural changes in Accelerated Irrigation Benefit Programme (AIBP) are being made. Also Allocation for AIBP in 2012-13 stepped up by 13% to Rs 14,242 crore.
Since the food processing sector has been growing at an average rate of over 8% over the past 5 years, In order to have a better outreach and to provide more flexibility to suit local needs, it has been decided that a new centrally sponsored scheme titled "National Mission on Food Processing" would be started, in cooperation with the State Governments in 2012-13.
- Education - Assessing the fact that education is pivotal to mould India's future, and every child has a right to education in the year 2012-13 Rs 25,555 crore provided for Sarva Shiksha Abhiyan (SSA) representing an increase of 21.7% 2011-12. Similarly for Rashtriya Madhyamik Shiksha Abhiyan (RMSA) - which was started to launched in March, 2009 to enhance access to quality secondary education, Rs 3,124 crore is provided, thereby representing an increase of 29% over 2011-12. Similarly, ensure better flow of credit to students, a Credit Guarantee Fund is proposed to be set up.
While the DTC has been delayed, (due on-going work on the same done by the Parliamentary Standing Committee on Finance), the Budget 2012 has move a step closer to DTC by increasing the base exemption limit to Rs 2,00,000 (from the present Rs 1,80,000). Similarly the DTC rates have been proposed to be introduced for personal income tax. Thus now personal income tax slabs are proposed to be as under for general category of individual tax payers which will provide a relief of Rs 2,000 for individual tax payers:
|Income-tax rates in Budget 2012 |
|Taxable Income ||Tax Rate |
|Upto Rs 200,000 ||Nil |
|Rs 200,001 to Rs 500,000 ||10% |
|Rs 500,001 to Rs 10,00,000 ||20% |
|Rs 10,00,001 & above ||30% |
Some numbers will help us better recognise the impact of this move.
|Taxable Income (Rs) || || 10,00,000 |
|Upto Rs 180,000 ||Nil || |
|Rs 180,001 to Rs 500,000 ||10% ||32,000 |
|Rs 500,001 to Rs 800,000 ||20% ||60,000 |
|Rs 800,001 & above ||30% ||60,000 |
|Tax payable || ||152,000 |
|Education Cess ||3% ||4,560 |
|Total Tax (Rs) || ||156,560 || || |
|Taxable Income ( Rs ) || ||10,00,000 |
|Upto Rs 200,000 ||Nil || |
|Rs 200,001 to Rs 500,000 ||10% ||30,000 |
|Rs 500,001 to Rs 10,00,000 ||20% ||100,000 |
|Rs 10,00,001 & above ||30% || |
|Tax payable || ||130,000 |
|Education Cess ||3% ||3,900 |
|Total Tax (Rs) || ||133,900 |
Let's take the case of a male individual whose net taxable income is Rs 10,00,000. As per the current tax laws his income tax liability will be Rs 1,56,560 (for FY 2011-12), while in the FY 2012-13, once the new base exemption limit applies, his tax liability will work out to Rs 1,33,900, i.e. a saving of Rs 22,660.
For Senior citizens nothing has changed, the base exemption stands at Rs 2,50,000 while the qualifying age for senior citizens stands at 60 years. Also in the previous budget 2011-12 a special category called "Very Senior Citizens", age 80 and above with the base exemption limit at Rs 5,00,000 still prevails.
In addition to this, the Budget 2012 has also laid down a few sweeteners:
- Exemption of upto Rs 10,000 for interest from savings bank accounts for individual tax payers
- Deduction of upto Rs 5,000 for preventive health check up
- Senior citizens not having income from business proposed to be exempted from payment of advance tax
- Reduction in Securities Transaction Tax (STT) by 20% to 0.1% on cash delivery transactions
- Exemption from Capital Gains tax on sale of residential property, if sale consideration is used for subscription in equity of a manufacturing SME for purchase of new plant and machinery.
While in the last year’s budget speech did mention about continuation of deduction of Rs 20,000 (u/s. 80CCF), for investment in long-term infrastructure bonds for one more year; the budget 2012 was silent about extending such deduction this year. Hence we still need to ascertain whether this deduction would be extended in the fiscal year 2012-13.
As far as corporate taxes are concerned the rates have been kept unchanged but the rate of withholding tax on interest payment on ECBs is proposed to be reduced to 5% from 20% for 3 years for certain sectors.
In order to moderate the outgo of profit-linked deductions a proposal to extend the levy of Minimum Alternative Tax (MAT) to all persons, other than companies, has been put forth.
We think the proposed increase in the base exemption limit, would provide some relief to a large number of individual tax payers, as it means more disposable income in the hands of consumers, which may drive the consumption story.
Vigilance on tracking unaccounted money:
- Introduction of compulsory reporting requirement in case of assets held abroad
- Allowing for reopening of assessment upto 16 years in relation to assets held abroad
- Tax collection at source on purchase in cash of bullion or jewellery in excess of Rs 2 lakh
- Tax deduction at source on transfer of immovable property (other than agricultural land) above a specified threshold
- Tax collection at source on trading in coal, lignite and iron ore increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value
- Taxation of unexplained money, credits, investments, expenditures etc. at the highest rate of 30% irrespective of the slab of income
As a measure of fiscal prudence i.e., to the rein in the worsening fiscal deficit situation, the Finance Minister (FM) - Mr Pranab Mukherjee proposed to raise the Service Tax to 12% from the present rate of 10% (keeping in mind the share of services in GDP which is 59%). The FM also brought to the shore two important challenges to sustain the Service Tax Act, 1994 (which will complete 18 years in June 2012 and thus attain ‘adulthood'). They are:
- Share of services: The share of services in the taxes is far below its potential and hence there is a need to widen the tax base and strengthen its enforcement by bringing in more services under the tax net.
- Service Tax Law: Service Tax Law is complex and sometimes avoidably different from Central Excise. Harmonisation of the Service Tax Law with the Central Excise is required in order to eventually make a transition to the Goods and Services Tax (GST)
Addressing to the issue of share of services in taxes, the Finance Minister has proposed to bring all the services under the tax net except those under the negative list (a new concept which is perceived to be both sound economics and prudent fiscal management) and those forming part of the exemption list. The negative list comprises of 17 heads and has been carefully drawn upon keeping in view the federal nature of our country's political organisation, the best international practices and the country's socio-economic requirements.
Some of the important inclusions in the negative list are as follows:
- All services provided by the Government or local authorities except a few specified services where they compete with the private sector
- Pre-school and school education, recognised education at higher levels and approved vocational education
- Renting of residential dwelling
- Entertainment and amusement services
- Public transportation including inland waterways, urban railways and metered cabs
- Under agriculture and animal husbandry, all services required for cultivation, breeding, production, processing or marketing up to the stage the produce is sold in the primary market
In addition to the negative list, there are services which form a part of the exemption list, some of which are:
- Services provided by charities
- Religious persons
- Performing artists in folk and classical arts
- Individual advocates providing services to non-business entities
- Independent Journalists
- Services by way of animal care or car parking
- Services of business facilitators and correspondents to banks insurance companies in rural areas
- Construction services relating to specified infrastructure, canals, irrigation works, post-harvest infrastructure, residential dwelling, and low-cost mass, housing up to an area of 60 square meter under the Scheme of Affordable Housing in Partnership
- Exemption for the monthly charges payable by a member of a housing society increased to Rs 5,000 from Rs 3,000
- Service tax exemption on copyrights relating to recording of cinematographic films
Giving due attention to the second challenge of reducing the complexity of the Service Tax Law, the Finance Minister has proposed that the law will be shorter by nearly 40% in terms of number of pages. Furthermore in order to harmonise the Central Excise and Service Tax, a common simplified registration form and a common return for Central Excise and Service Tax, called EST-1 will be introduced. This common return form will comprise of only one page, a significant reduction from 15 pages of the two returns (Service Tax and Central Excise) at present.
Some of the other measures undertaken to address the issue of complexity are:
- Resolve disputes with far greater ease - Introducing Revision Application Authority and Settlement Commission
- Reduce cascading (multiplying) effects of taxes by permitting utilisation of input tax credits in a number of services such as catering, restaurants, hotel accommodation, pandal and shamiana and transport sectors
- Place of Supply Rules - to determine the location where the service shall be deemed to be provided; initiate an informed debate to assess all the issues that may arise in the taxation of inter-state services for the eventual launch of GST
- Common tax code for Service Tax and Central Excise
- Simplifying refunds (problems faced by exporters of goods with respect to taxes on input services) without resorting to voluminous documentation or verification. Such refunds will also be admissible for taxes on taxable services that have been exempted
- Rules pertaining to the Point of Taxation are also being rationalised, providing greater clarity and removing the irritants
In addition to the above, the FM also proposed certain changes in the other indirect taxes as well.
- Standard rate of excise duty for non-petroleum goods increased to 12% from 10%;
- Excise duty on large cars increased to 24% from 22%; In case of cars that attract a mixed rate of duty of 22% + Rs 15000 per vehicle, the duty has been increased to an ad valorem rate of 27%
- Peak customs duty of 10% on non-agricultural goods maintained
As a part of relief proposals for certain sectors (especially those under stress), the Finance Minister have laid down certain measures in order to stimulate investment and manufacturing growth:
- Agriculture & Related Sectors
- Import of equipment for initial setup or substantial expansion of fertiliser projects being fully exempted from basic customs duty of 5% for a period of three years up to March 31, 2015
- Reduction in basic customs duty to 2.5% from 7.5% on sugarcane planter, root or tuber crop harvesting machine and rotary tiller and weeder
- parts for the manufacture of these
- Reduction in basic customs duty to 5% from 7.5% on specified coffee plantation and processing machinery
- Concessional basic customs duty of 5% to extend project import benefit to green house and protected cultivation for horticulture and floriculture
- Basic customs duty on some water soluble fertilisers and liquid fertilisers, other than urea, reduced to 5% from 7.5% and to 2.5% from 5%
- To extend concessional import duty available for installation of Mechanised Handling Systems and Pallet Racking Systems in mandis or warehouses for horticultural produce
- Full exemption from basic customs duty and a concessional countervailing duty (CVD) of 1% to Steam coal for a period of two years till March 31, 2014
- Full exemption from basic duty has also been extended to Natural Gas and Liquefied Natural Gas (LNG), Uranium concentrate, Sintered Uranium Dioxide in natural and pellet form
- Basic customs duty on machinery and instruments for surveying and prospecting reduced to 2.5% from 10% or 7.5%
- Full exemption from basic customs duty to coal mining projects
- Railways and Roads
- Basic customs duty on equipment required for implementation of Train Protection and Warning System and upgradation of track structure for high speed trains reduced to 7.5% from 10%
- Full exemption from import duty on specified equipment imported for road construction extended to contracts awarded by Metropolitan Development Authorities; tunnel boring machines and parts of their assembly also covered under this exemption
- Civil Aviation
- Import of parts of aircraft and testing equipment fully exempt from basic customs duty in order to establish India as a hub for third-party Maintenance, Repair and Overhaul (MRO) of civilian aircraft
- Full exemption from basic customs duty to both new and retreaded aircraft tyres
In order to revive the manufacturing sector which has borne the brunt of high borrowing and input costs due to the high interest rates in the country (result of RBI's anti-inflationary stance), the FM has proposed a slew of tax reliefs, some of them are:
- Basic customs duty on plant and machinery imported for setting up or substantial expansion of iron ore pellet plants or iron ore beneficiation plants reduced to 2.5% from 7.5%
- Reduction in basic customs duty on coating material for manufacture of electrical steel to 5% from 7.5%
- No customs duty on nickel ore and concentrate and nickel oxide/ hydroxide
- Export duty on chromium ore enhanced to 30% ad valorem from Rs 3,000 / ton
- Enhance basic customs duty on non-alloy, flat-rolled steel to 7.5% from 5%
In his effort to address the issues relating to the textile industry which urgently needs to modernize, the FM has laid down the following exemptions to new textile machinery only:
However, the second-hand machinery would now attract basic duty of 7.5%. In addition to these the FM also pointed out some other proposals for the textile industry:
- Automatic shuttle-less looms fully exempt from basic customs duty of 5%
- Full exemption accorded to automatic silk reeling and processing machinery as well as its parts
- Basic customs duty on wool waste and wool tops slashed to 5% from 15%
- Reduction in basic customs duty on Titanium dioxide to 7.5% from 10%
- Full exemption from basic customs duty to aramid yarn and fabric used for the manufacture of bullet proof helmets
- Incidence of duty as a percentage of the Retail Sale Price for branded ready-made garments would come down to 3.6% from 4.5%
For the MSME sector which the FM construes as a fertile ground for the production of low-cost medical devices, the basic customs duty has been reduced to 2.5% with concessional CVD of 6% on specified parts, components and raw materials for the manufacture of some disposables and instruments. Further there has been a full exemption from customs duty and CVD is also being extended to specified raw materials for the manufacture of coronary stents and heart valves.
Some of the other proposals to support the manufacturing sector include:
- Full exemption on basic customs duty on waste paper, LCD and LED TV panels, and parts of memory card for mobile phones
- Reduction of basic customs duty on specified raw materials for the manufacture of adult diapers to 5% with CVD of 6% and nil special CVD
- Enhance basic customs duty on bicycles to 30% from 10% and on bicycle parts to 20% from 10% (highly labour-intensive)
- Reduce excise duty on matches manufactured by semi-mechanised units 6% from 10%
- Health and Nutrition
- To extend concessional basic customs duty of 5% with full exemption from excise duty/CVD to six specified life-saving drugs/vaccines which are used for the treatment or prevention of ailments such as HIV-AIDS, renal cancer, etc.
- Basic customs duty on Soya protein concentrate and isolated soya protein reduced to 10%
- Excise duty on all processed soya food products is being reduced to the merit rate of 6%
- Concessional basic customs duty of 2.5% along with reduced excise duty of 6% on iodine
- Basic customs duty on probiotics reduced to 5% from 10%
- Plant and equipment for setting up solar energy and solar power projects fully exempt from special CVD
- Excise duty on LED lamps reduced to 6%; coating chemical used for compact fluorescent lamps fully exempt from basic customs duty
- Specific parts required for manufacturing hybrid vehicles fully exempt from basic customs duty and special CVD with concessional excise duty/ CVD of 6%
- Imports of Gold and other precious metals
The growth of almost 50% in imports of gold and other precious in the first three quarters of this year have been the major drivers of the Current Account Deficit (CAD). To keep a check on this trend and improve the CAD, the FM has:
- Increased basic customs duty on standard gold bars; gold coins of purity exceeding 99.5% and platinum to 4% from 2% and on non-standard gold to 10% from 5%
- Enhanced the basic duty on gold ore, concentrate and dore bars for refining 2% from 1%
- Increased excise duty on refined gold to 3% from 1.5%
- Imposed basic customs duty of 2% on cut and polished, coloured gem stones at par with diamonds.
As an additional resource mobilisation for the Government, the FM has proposed the following measures
- Taxing Demerit goods
- Basic excise duty on cigarettes of more than 65mm length by adding an ad valorem component of 10% (chargeable on 50% of the Retail Sale Price declared on the pack) to the existing specific rates
- Nominal increase in basic excise duty on hand-rolled bidis to Rs 10 per thousand and on machine-rolled bidis Rs 21 per thousand; existing exemption available to hand-rolled bidis for clearances up to 20 lakh bidis per annum is being retained
- The FM has proposed to increase the rate of cess to Rs 4,500 from Rs 2,500 per metric tonne for crude petroleum oil produced in India
- Basic customs duty on Completely Built Units (CBU) of large cars/ MUVs/ SUVs having engine capacity above a prescribed threshold and whose value exceeds U.S. $40,000 per vehicle increased to 75% ad valorem from 60%
Along with the resource mobilisation measures, the FM also addressed to certain rationalisation measures
IMPORTANT BUDGET 2012-13 ESTIMATES
- Unified rate of 12% + Rs 120 PMT for non-mini cement plants and 6% + Rs 120 PMT for mini-cement plants and charge this duty on the Retail Sale Price less abatement of 30%
- Jewellery, not bearing a brand name
- Excise duty of 1% on tariff value equal to 30% of the transaction value
- Extend small-scale exemption up to annual turnover not exceeding Rs 1.5 crore for units having a turnover below Rs 4 crore in the previous year; compute turnover on the basis of tariff value
- Place the onus of registration and payment on the person who gets jewellery manufactured on job-work
- Branded silver jewellery fully exempted from excise duty
- Ad valorem rate of 3% on building of commercial vehicle bodies
- Exempt CVD of 5% on ships and vessels including dredgers; to ensure that ships, vessels and dredgers manufactured in India do not face disability vis-à-vis foreign-going ships converting into coastal vessels, necessary safeguard is being provided
- Baggage Allowance
Duty-free allowance for eligible passengers of Indian origin to Rs 35,000 from Rs 25,000 and for children of up to 10 years Rs 15,000 from Rs 12,000
|Particulars ||Rs in Crore |
|Gross tax receipts ||10,77,612 |
|Net Tax to the Centre ||7,71,071 |
|Non-tax Revenue Receipts ||1,64,614 |
|Non-debt Capital Receipts ||41,650 |
|Total budget expenditure ||14,90,925 |
|Plan expenditure ||5,21,025 |
|Non-plan expenditure ||9,69,900 |
|Fiscal deficit target (as a % of GDP) ||5.1 |
|Net market borrowing required to finance the deficit ||4.79 lakh |
|Central Government debt (as a % of GDP) ||45.5 |
|Effective Revenue Deficit (as a % of GDP) ||1.8 |
Considering the Budget 2012 holistically, in our opinion the Finance Minister has attempted to give his midas touch to various sectors and the industries within. Reforms also have been emphasised on, fiscal deficit widening as estimated remains a cause of concern, while steps towards fiscal consolidation have been undertaken along with due attention given to public health and sanitation, education, reforms for women and children as well.
On the direct tax front, we believe that the Budget 2012-13 has moved one more step closer to DTC, by increasing the base exemption limit for the general category. Moreover, as a sweetener for the aam aadmi, the tax slabs have been raised too. For corporates, though the tax rate has not been changed, the withholding tax has been reduced to 5% for 3 years for certain sectors.
Impact on Equity Markets
Equity markets didn't get amused with the Budget 2012 (March 16, 2012). The equity markets ended in the negative terrain by more than 1%. Though the budget addressed to the fiscal consolidation measures and put down a whole list of measures, the fiscal deficit projected for the fiscal year 2012-13 at 5.1% was the dampening factor. Moreover, the disinvestment target of Rs 30,000 crore for 2012-13 and the total budgeted expenditure for the 2012-13 of Rs 14,90,925 crore for the Government didn't throw any positive signals on the fiscal consolidation front as there were no clear signs of increase in Government revenues.
Impact on Debt Markets
The Government's borrowing figures for 2012-13 of Rs 4.79 lakh crore didn't go down well with the debt markets and as a result the ten year bond yields shot up by 10 basis points. Moreover with the fiscal deficit for 2012-13 estimated at 5.1%, the bond markets will now have their eye glued on the RBI policy actions (still RBI has not started with its rate cut exercise) and liquidity conditions for further direction. However, RBI has clearly indicated that there will no further hikes and may soon start reducing the repo and reverse repo rates in order to augment the economic growth of the country.