Analysis: Winning & losing sectors

Automobiles

The government has declared its intention of making India a global hub of small cars. In light of this it has proposed an excise duty cut from 24% to 16% on small cars. A small car, for this purpose, will mean a car of length not exceeding 4,000 mm and with an engine capacity not exceeding 1,500 CC for diesel cars and not exceeding 1,200 CC for petrol cars.

Further, the ongoing success of the National Highways Development Programs and the government's decision to develop 1,000 km of access – controlled Expressways will further boost demand for the automobile sector. The reduction in the peak rate of customs duty from 15% to 12.5% will benefit the industry in terms of lower cost of imported automotive components.

Banking and Finance

The Union Budget was presented in the background of a non-food credit growth in excess of 25% reflecting an investment boom in the country. The budget proposes to increase the credit flow to the farm sector to an amount of Rs. 175,000 crores, an increase of 23.6% during 2006-07. This would amount to adding another 50 lakh farmers to the ban king industry's portfolio. It is the government expressed intention to double credit flow to the farm sector in the next 3 years. In light of the severe difficulties faced by the farmers in some parts of the country, the budget proposes to grant some relief to those farmers who have availed of crop loans from Scheduled Commercial Banks, RRBs and PACS for Khariff and Rabi 2005-06. An amount equal to 2 % points of the borrower's interest liability on the principal amount upto Rs. 1 lakh will be credited to the farmers account before March 31, 2006.

The government has also decided to ensure that the farmer receives short-term credit at an interest rate of 7% with an upper limit of Rs. 300,000 on the principal amount. This could potentially have adverse implications on the credit quality of the banks going forward.

Considering the importance of the food processing industry to the overall economy in terms of job creation, benefits to consumers and savings from wastages, this industry has been treated as a priority sector for bank credit. NABARD will create a separate window with a corpus of Rs. 1,000 crore for refinancing loans to the sector.

Fixed deposits with tenure of 5 years or more will be eligible for tax benefits under Section 80C of the Income Tax Act. This could act as a major boost for mobilization of long term funds by banks.

It has been clarified that no deduction would be available for outstanding interest amounts converted into loans. This could impact debt restructuring plans of banks with the borrowers. Further, this amendment is intended to have retrospective impact.

However, the much anticipated relaxation on the cap of voting rights in banking companies has not been addressed.

Service Tax Impact on Banking Industry

Budget have introduced few more services inter alia including ATM operations, recovery agent services, credit card and other card related services, share transfer agent services. This may affect the banking industry and would increase the transaction cost for the customers.
 
 As expected has been the Securities Transaction Tax has been increased by percentage basis as under: 

regime will now pay tax on long term capital gains arising out of transactions in listed equity shares and equity oriented mutual fund units.

Close ended and open ended equity oriented mutual units have been made at par with removal of Dividend Distribution Tax on close ended schemes.

The investment limit in equities for being qualified as equity oriented fund has been increased to 65% from the present level of 50%. 

 The tax withholding rate on short term capital gains for individual non-resident Indians has been rationalized to bring it on par with the actual tax rate.  Earlier, the tax withholding rate was higher than the actual tax rate.

 Further liberalization in FII investment in government securities from US $ 1.75 billion to US $ 2 billion and increase in limit of FII investment in corporate debt from US $ 0.5 billion to US $ 1.5 billion will further deepen and broad base the domestic debt market.

The aggregate investment by domestic mutual funds in overseas instrument has been increased from US $ 1 billion to US $ 2 billion, alongwith the removal of the requirement of 10% reciprocal share holding. A limited number of qualified Indian mutual funds have been allowed to invest, cumulatively upto US $ 1 billion, in overseas exchange traded funds.

 Qualified mutual funds, provident funds and pension funds have been extended access to the anonymous electronic order matching trading module on the Negotiated Dealing System of RBI. This will further deepen trading and participation in the government securities market.

 Information Technology

With the spread of information technology and IT enabled services, the government now wants to make India a preferred destination for the manufacture of semi conductors and other high technology IT products including wafer, flat LCD/ Plasma panel displays and storage devises.  The Ministry of Information Technology will shortly announce a policy providing details in this regard.

An excise duty at the rate of 12% has been re-imposed on computers. Simultaneously, the government has fully exempted DVD drives, flash drives and combo drives from the purview of excise duty.

 Packaged software sold over the counter will attract an excise duty of 8%. However, customized software and software packages downloaded from the internet will be exempt from this levy.

 The reduction in the peak customs duty rate from 15% to 12.5% is expected to lower the cost of imported raw materials and therefore benefit the domestic hardware industry.

 Infrastructure

The time period provided for availing tax holiday under Section 80-1A of the Income Tax Act has been extended in the case of industrial parks, SEZ and power sector. However, entities in the power sector will continue to pay minimum alternative tax, wherever applicable.

 The tax so available under Section 10-23G is being removed. This is likely to have substantial impact on investment in this sector.

 Service Tax Impact on Infrastructure Sector

 Due to widening of service tax net to cover services like ship management, internet telephoning, transport of goods in container by rail (except by government railway) may affect the infrastructure industry.

 Entertainment Industry

Set top box would not attract basic customs duty.  However CVD @ 16% plus special additional duty of customs will be levied @ 4%.

Service tax impact on entertainment industry

 Services of sale of space or time for advertisements (except in print media) and sponsorship services (except of sport events) may impact the entertainment industry with the increase in cost for the consumer.

Food Products

Excise duty on food products like biscuits, packed foods reduced from 16% to 8%. Excise duty on aerated water, soft drinks and reduced from 24% to 16%.

Excise Duty on condensed milk, ice cream, yeast, pasta, processed meat, fish and poultry products reduced from 16% to Nil.

The reduction in excise duty would boost the volume and therefore the food industry.

 Health

Custom duty on 14 specified anti-cancer and 10 specified Anti-drugs and bulk drugs for their manufacture is reduced to 5% with Nil CVD by way of excise duty exemption.  Custom duty is also reduced to 5% on 2 specified diagnostic kits and 1equipment.  These kits / equipment will be exempt from CV duty also by way of excise duty exemption.  Similarly custom duty on parts of hearing aids has been reduced from 5% to Nil.