Indian Budget 2006 :: Budget Impact on Sectors

07. IT/ITES: - (Favourable Weather)

a) Policy proposed for manufacturing of IT hardware products such as semiconductors, waters, LCDs, storage devices etc.

b) Imposing of 8 per cent excise duty on packaged software.

c) DVD drives, flash drives and combo drives fully exempt from excise duty.

d) Existing vehicle of viability gap funding and India Infrastructure Finance Co. to provide equity and funds to new ventures. Window to be open for 3 years.

e) Re-imposition of excise duty of 12 per cent for full input tax credit; no impact on price though.

The budget for the IT/ITES can be said as favourable as the government has given an opportunity for the IT industry to grow further. The policy to be announced on hardware manufacturing will truly give India an avenue to prove its mettle in the global market and turn itself in a hardware manufacturing hub. The 3 years window created to provide equity participation and funds through the viability gap funding and India Infrastructure Finance Company is a welcome step, which shows the government's interest in promoting the industry. The Fringe Benefit Tax (FBT) on tour and travel expenses, which has been reduced from 20 per cent to 5 per cent, will have marginal impact on BPO players. The e-governance initiative of the government is a new business opportunity for IT companies as the government would be approving shortly around 25 projects and aims to bring more services online. The re-imposition of excise duty at 12 per cent on computers will give a competitive edge to domestic manufacturers over importers, as domestic manufacturers can now avail of credit of excise duty paid on inputs. The excise duty of 16 per cent reduced to nil on DVD drives. The impact would be the increase in demand for such products and company such as Moser Baer. However, the 8 per cent excise duty on packged software is concern as the software industry as these now become bit costly and would hit the domestic software industry

08. Metal: - (Mixed bearings)

a) Customs duty has been reduced from 10 per cent to 7.5 per cent on primary and semi-finished forms of following metals like (i) alloy steel, (ii) aluminium, (iii) copper, (iv) zinc, (v) ashes and residues of copper and zinc, (vi) tin, (vii) base metals such as, tungsten, magnesium, cobalt, titanium, (viii) calcined alumina.

b) Customs duty been reduced from 5 per cent to 2 per cent on mineral ores and concentrates.

c) Customs duty on ferro alloys has been reduced to 7.5 per cent from 10 per cent.

d) Customs duty of 5 per cent has been imposed on iron and steel melting scrap.

Overall, the budget impact on the steel sector will be neutral. Even though the custom duty has been reduced, 4 per cent countervailing duty (CVD) has been imposed. But the impact of the CVD stands neutralized as credit for CVD can be taken against the payment of excise duty. Hence reduction in basic custom duty will reduce the effective landed cost.

The reduction in the custom duty will reduce the landed cost by around Rs. 3,200 to 3,500 per tonne, but the domestic prices are still less than the landed cost. The landed cost of the copper is expected to reduce by around Rs. 7000 per tonne, but the comparable gains from the reduction in the duty on copper concentrates will keep the profitability in the sector intact.

The reduction in the custom duty of zinc may make a negative impact on Hindustan Zinc, but will make a positive impact on Galvanised steel producers like Uttam Galva Steel, JSW steel and Ispat Industries. The de-blocking of coal blocks of 20 billion tones coal is positive the steel sector.

The increase in custom duty to 5 per cent from nil, on steel will give some relief to the steel manufacturers, but the steel scrap which be charged 5 per cent custom duty, creating negative impact on the players like Essar Steel and Bhushan Steel. But it will make a positive impact on the sponge iron manufactures. Over all there will be marginal positive impact on Tata Steel, SAIL and JSW steel and negative impact on Nalco and Madras Aluminium.

09. Oil & Gas: - (Mixed impact)

a) Cess on downstream players increased from Rs. 1800 to Rs. 2500 per tonne.

b) custom duty on naphtha reduced from 10 to 5 per cent.

c) Custom duty on petroleum coke has been reduced from 10 to 5 per cent.

d) Import duty on pipeline projects of natural gas, crude oil reduced to concessional rate of 10 per cent.

e) Custom duty on petcoke.

With no major changes in the duty structure, the FM to raise its resources, has imposed an additional cess of Rs.700 per tonne on cash rich exploration companies like ONGC and Oil India. This is over and above the existing subsidy burden and would dent into the profitability of these two companies going forward. ONGC expects its earnings to be lowered by nearly Rs. 1600 to 1800 crore due to this additional burden.

This additional burdent of cess is clearly a negative for upstream playears. Infact ONGC would also be adversely impacted by the increase in the service tax rate from 10 per cent to 12 per cent to be levied on survey and exploration activities. This same would also impact companies like Reliance. Further the import duty on pipeline projects for transportation of natural gas, crude petroleum and petroleum products has been reduced to concessional rate of 10 per cent. This would reduce the capital cost companies, which arte in transnational pipeline such as Gail, GSPL and IOC.

In fact there was huge expectation from the buget to reduce the subsidy burden but no such move in this regard have disapointed the investment community. For the downstream players, the FM accorded LPG with declared goods status that would result in a uniform rate of 4 per cent sales tax as against current sales tax between 12.5 to 8 per cent varyin across different states. This move may be marginally positive for down stream companies (like HPCL, BPCL, IOC) provided the final prices remains unchanged (as this would reduce its subsidy burden to the tune of Rs. 20 per cylinder). Moreover, the custom duty on petcoke reduced from 10 to 5 per cent and naphtha (for polymers production) to nil, may negatively impact the realization of the refining companies. Even the customs duty on propane, butane, and natural gas has also been reduced to 5 per cent. Importers of propane such as IPCL are likely benefit from this duty cut. Finally the government proposes to have an outlay of Rs. 22,000 crore for refining sector alone in the next few years to increase the refining capacity of the country. Thus on an overall basis, it is clearly a negative impact for upstream players and neutral for downstream players..

10. Papers: - (impetus to growth)

a) Peak custom duty reduced to 12.5 per cent from 15 per cent.

b) Excise duty cut to 12 per cent from 16 per cent.

c) Higher allocation for education.

The paper industry has welcomed the budget presented by finance minister as the excise duty for paper products has been reduced to 12 per cent. This would now provide an impetus of growth for the paper industry. Previously around 65 per cent of the paper products were subject to 12 per cent duty, while this move would now bring in the remaining 35 per cent of the products under the same bracket thereby providing a level playing field for all produces. The other important announcement is the increased education sector expenditure by 32 per cent will also act as an indirect growth driver for the paper industry going forward.