Union Budget 2005-06

Building a New India

India Infoline Research Team

ItÊs all about money, honey!

 Budget 2005-06

Fiscal Position

¾ The Fiscal Responsibility and Budget Management Act (FRBM) requires reduction
of 0.5% and 0.3% of revenue deficit and fiscal deficit respectively, every year. In
FY05, this target would be achieved, as the year is expected to end with a revenue
deficit of 2.7% and fiscal deficit of 4.5% of the GDP.
¾ Implementation of Twelfth Finance Commission (TFC) will put a burden of Rs260bn
on the Government in FY06. (TFC recommendations cover tax devolution, grants to
states, debt relief, financing of relief matters, etc).This will put pressure on the fiscal
targets of FY06.
¾ The Government intends to resume the process of fiscal correction from FY07 and
achieve the FRBM targets by FY09.
¾ Budget targets revenue and fiscal deficit of 2.7% and 4.3% respectively for 2005-06.

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Budget at a glance

Source: Budget Documents

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 Budget 2005-06

Subsidy not phased out

¾ As expected, subsidies have not been phased out. Fertilizer subsidy hiked by Rs5.9bn, food
subsidy by Rs4bn. FM indicated that fertilizer subsidy bill could be cut in future if naphtha
and F0/LHS are replaced by natural gas.
¾ No amendments on PDS.
¾ Defence allocation has been increased Rs830bn, including Rs343bn for capital expenditure.

Break up of expenditure
(Rs bn) FY05 (RE) FY06 (BE)
Non-plan
Interest payments 1,259 1,339
Defence 770 830
Food Subsidy 258 262
Fertilizer Subsidy 157 163
Police 105 122
Other non-plan expenditure 434 397
Non-plan grants to states 141 333
Pensions 183 195
Non-plan capital outlay 34 45
Expenditure of UT without legislature 16 22
Total (non-plan) expenditure 3,357 3,708

Plan
Central Plan 825 1,104
Central assistance for State and UT 549 621
Total (plan) expenditure 1,374 1,725
Source: Budget Documents
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 Budget 2005-06

Personal Taxes

New tax brackets

Tax slabs New rates
Up to Rs1lac nil
Rs1lac-Rs1.5lac 10%
Rs1.5lac-Rs2.5lac 20%
Above Rs2.5lac 30%
Source: Budget Documents

¾ Exemption levels for women and senior
citizens hiked to Rs1.25lacs and Rs1.5lacs
respectively.
¾ Removal of standard deduction. Section 88
and 80L abolished.
¾ Consolidated limit of Rs1lac for all savings,
to be deducted from the income before tax
is calculated.
¾ Surcharge of 10% to be levied only on
taxable income of Rs10lacs.
Tax exemptions to continue for:
¾ Interest paid on housing loans
¾ Medical insurance premia
¾ Specified expenditure on disabled
dependent
¾ Expenses on self medical treatment or on
dependent
¾ Interest loans for pursuing higher studies
¾ Person with disability

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 Budget 2005-06

Direct Taxes

¾ Corporate tax reduced for domestic companies from 35% to 30%, surcharge increased to 10%

¾ Corporate tax for foreign companies maintained at 40%, surcharge maintained at 2.5%

¾ Depreciation rate for general machinery and plant to be cut from 25% to 15%. However, the initial
depreciation can be claimed at 20%.

¾ Fringe Benefit Tax to be imposed on employers for benefits enjoyed collectively by the employees.
It will be 30% on an appropriately defined base. Conveyance & canteen services would be out of
this tax purview.

¾ Service tax rate maintained at 10%. New services like pipeline transport of goods, site formation,
demolition and like services, membership fees of clubs, packaging and mailing services, survey
and map making services, construction of planned residential complexes, etc have been included
in the service tax net.

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Key beneficiaries of reduction in corporate tax

Sectors Companies
Auto/Anc Mar uti, Hero Ho nda, TVS, Bharat Forge, Rico Auto
Banks SBI, Canar a Bk, BoB, HDFC Bank
Cement ACC, Grasim
Construction Gammo n India, Nagarjuna Co nstruction, HCC
Engineering ABB, BHEL, L&T, Sieme ns, Thermax
FM CG ITC,Colgate, Gillette, HLL, Nir ma, P&G
Hotels Asian Hotels,Taj GVK,Thomas Cook
Oil & Gas HPCL, CPCL, M RPL, IPCL, ONGC
Pharma Glaxo SmithKline, Pfizer, Wockhardt
Steel TISCO, SAIL, Hindalco, NALCO, Jindal Stainless
Telecom VSNL, Bharti Tele ventures
Te xtiles Welspun India, Abhishe k Industries

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 Budget 2005-06

Indirect Taxes

¾ Customs duty
• On non-agricultural products reduced to 15%.
• On selected capital goods, to range between 5-15%.
• Reduction in duties on metals like coking coal, aluminum and copper.
• Cut in duties of crude oil, LPG, SKO and other petroleum products.

¾ Excise duty
• On polyester filament yarn, tyres and air conditioners reduced to 16% from 24%
• On Passenger Cars and Aerated Water duties maintained at 24%
• Special excise on tea (Re1 per kg), edible oils (Re1 per kg) and vanaspati (Rs1.25
per kg) abolished

¾ Special cess on petrol and diesel to of 50paise per litre – to fund Highway Projects

¾ VAT to be implemented from April 1, 2005.

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 Budget 2005-06
CMP thrust areas : Agriculture, Education, Health

Agriculture
¾ Disbursement of agricultural credit to be Rs1,085bn in FY06.
¾ Horticulture Mission to be launched on April 1, 2005 and Rs6.3bn have been allocated for it.
¾ Budgeted outlay of Rs48bn on the Accelerated Irrigation Benefit Program (as against Rs28bn in
2004-05 BE). An additional Rs4bn would be invested in promoting micro irrigation technology.
Government intends to improve coverage to 3mn hectares in X Plan and 14mn hectares in XI Plan.
¾ Micro finance development fund increased to Rs2bn.
¾ Antyodaya Anna Yojana to increase coverage to 250mn families.

Health
¾ Estimated expenditure on health and family welfare to be Rs102bn in FY06.
¾ National Rural Health Mission to be launched in FY06.
¾ Excise duty of about 10% on cigarettes; Surcharge of 10% ad valorem duties on other tobacco
products.

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Education
¾ Education cess to continue.
¾ Allocation to “Sarva Shiksha Abhiyan” increased to Rs71bn in FY06.

Infrastructure
¾ A corpus of Rs80bn in FY06 for Rural Infrastructure Development Fund.
¾ NHDP III to be launched in FY06, to develop selected high density highways that do not form a
part of Golden Quadrilateral .
¾ Creation of rural electrification distribution backbone envisaged.
¾ Special Purpose Vehicles (SPV), as expected, to be implemented to fund infrastructure projects.
Foreign exchange resources could be utilized to finance crucial imports.
¾ National Urban Renewal Mission to be launched in FY06, with an outlay of Rs55bn, including
a grant component of Rs16.5bn. Projects such as The Mumbai Metro Rail Project, the Mumbai
Trans Harbour Link, the Mumbai Western Expressway Sealink and the Bangalore Metro Rail
Project to be funded through this mission.

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 Budget 2005-06

Capital Market

¾ Securities Transaction Tax (STT)

increased from 7.5bps to 10bps on delivery based trades
increased from 1bps to 1.33bps on derivatives
increased from 1.5bps to 2bps for day traders

¾ Short term capital gains tax continues.

¾ Definition of ‘securities’ under the Securities Contracts (Regulations) Act, 1956 to be amended for
providing a legal framework for trading of securitized debt

¾ Permit FIIs to submit appropriate collateral, in cash or otherwise, when trading on derivatives.

¾ Gold Exchange Traded fund (GETFS) to be introduced with gold as the underlying asset, in order to
trade gold for as little as Rs100.

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Sectoral Impact

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 Budget 2005-06

Automobiles/ Auto Ancillaries

¾ Industry expectation of lower excise duty on passenger vehicles deferred.

¾ Excise duty on tyres reduced to 16% from 24%.
¾ Hike in excise duty of steel to 16% from 12% to impact margins.
¾ Customs duty on lead down to 5% from 15%.
¾ Reduction in customs duty on petrol and diesel to 10% from 15%. Re0.5 increase in cess on
petrol and diesel to Rs2 per litre from Re1.5 per litre.

Positive for- Auto Ancillaries and Two Wheeler Companies

Neutral for- Maruti Udyog and Tata Motors

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 Budget 2005-06

Banking

¾ Drop in corporate tax to 33% (including surcharge) expected to boost profits by 3-4% for most banks.

¾ Raising of capital through preference shares to help meet Basel II norms for CAR and maintain asset growth
rates and Government ownership.

¾ Provision for set off of losses and unabsorbed depreciation of acquired bank with its acquirer’s profits to
help mergers.

¾ Proposal of removal of bounds on SLR and limits on CRR to release funds for greater credit deployment
and also help improve margins

¾ Increase in deduction of Rs20, 000 on repayment of housing loan to Rs1 lac to benefit home loan players.

¾ The finance bill is silent on phasing out of Sec36, which should help HFCs maintain profitability.

Positive for – HDFC, SBI, ICICI Bank, HDFC Bank

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 Budget 2005-06

Capital Goods

¾ Increased thrust on infrastructure (roads, irrigation projects, airports, urban development) to

benefit engineering companies.
¾ Thrust on rural electrification to benefit power ancillary companies.
¾ Customs duties on capital goods import for textile machinery, food machinery, etc.
¾ Hike in excise duty on iron & steel to 16% to have a negative impact on the margins of
engineering companies.

Positive – ABB, BHEL, Siemens, EMCO Transformers, Bharat Bijlee, Crompton Greaves,
L&T.

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Cement & Construction

¾ Excise duty on clinker proposed to increase from Rs250/MT to Rs350/MT.

¾ Special Purpose Vehicle mooted for long term funding of road, port, airport and tourism projects.
Thrust on highway projects and road construction would be beneficial for construction as well as
cement companies. The overall outlay for National Highway development has been allocated to
Rs93.20bn in 2005-06.

¾ A special 50 paise per litre cess has been levied on petrol and diesel to raise additional resources
exclusively for national highway projects.

¾ Service tax to be levied on builders constructing planned residential complexes with more than 12
dwelling units.

Positive for all cement and construction companies like ACC, Gujarat Ambuja Cement Ltd, Ultra
Tech Cemco Ltd., Grasim Industries, Gammon India, HCC, and Nagarjuna Constructions.

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 Budget 2005-06

FMCG

¾ Excise duty on cigarettes hiked by 11% for micros and 1-4% on other segments.
¾ Surcharge of 10% on excise payable on pan masala, and specified tobacco products.
¾ Removal of AED of Re1 per kg on tea.
¾ Surcharge of Re1 per kg on refined edible oils and Rs1.25 per kg on vanaspati abolished
¾ Custom duty on molasses reduced from 20% to 10%. Excise duty on molasses has been increased
from Rs500 per ton to Rs1,000 per ton.
¾ Cut in peak import duty to 15% to help reduce costs of raw materials LAB, soda ash, etc.
¾ Excise duty of 2% imposed on branded articles of jewelry.

Positive for – Tata Tea, HLL, P&G, Nirma, Henkel SPIC, Vashisti Detergents, Ruchi Soya
Negative for – ITC, Titan

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Hotels

¾ Reduced corporate tax to benefit heavy taxpayers.

¾ Industry not granted “Infrastructure” status, as demanded by players.
¾ Excise duty reduced from 16% to 8% on cakes and pastries.
¾ Outlay for National Highway development increased from Rs65bn in 2004-05 to Rs93bn in
2005-06.
¾ SPV to finance infrastructure projects in specified sectors like roads, ports, airports and tourism.
Cumulative borrowing limit for 2005-06 set at Rs100bn.
¾ The National Urban Renewal Mission designed to upgrade urban infrastructure covering seven
mega cities Steps to be taken to make Mumbai city a regional financial center.

Positive for Thomas Cook, Indian Hotels, Asian Hotels and Taj GVK

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Information Technology

¾ Reduction in custom duty on computer inputs from 10% to 0%.

¾ CVD of 4% levied on the above imported inputs with credit for the proposed CVD available
against payment of excise duty.
¾ IT software imports to be exempt from the proposed CVD.
¾ Reduction in effective tax rate to 33.7% not to have any impact on software and hardware
companies due to available tax benefits.
¾ Taxation of fringe benefits to impact software companies.

Positive for – HCL Infosys, Zenith Computers & D-Link.

Marginally negative for – All software companies.

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Metals

¾ Reduction in custom duty on coking coal (greater than 12% ash content) from 15% to 5%.
¾ Excise duty on iron & steel increased from 12% to 16%.
¾ Custom duty on aluminum, copper and zinc reduced from 15% to 10%.
¾ Hike in FDI limit in mining to be considered.
¾ Increased thrust on infrastructure ie building roads, ports, airports, rails, etc.

Positive for – TISCO & SAIL.

Negative for – Hindalco & Nalco.
Neutral for – Other steel companies.

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 Budget 2005-06

Oil and Gas

¾ Reduction in custom duty on crude oil from 10% to 5%.

¾ Custom duties and excise duties on LPG and SKO abolished.
¾ Custom duty on other petroleum products brought down from 15-20% to 10% and the excise
duty structure to be a mix of specific duty and advalorem.
¾ Service tax being levied on pipeline services.

Positive for – HPCL, BPCL, IOC

Negative for – KRL, CPCL, GAIL
Neutral for – ONGC

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Pharmaceuticals

¾ The reduction in the corporate tax rate will have a positive impact for high tax paying pharma
companies.

¾ Customs duty on nine specified machinery in pharma and biotechnology sector is reduced to
5%.

¾ Weighted deduction of 150% of expenditure on in-house Research & Development facilities

extended from March 31, 2005 to March 31, 2007.

¾ Industry to strictly abide to the Product Patent regime.

Positive for- GlaxoSmithkline, Pfizer, Wockhardt.

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Telecom

¾ Corporate taxes reduced to 30%. However, surcharge has been increased by 10%. The effective
tax rate would be 33.7%
¾ Plant & machinery depreciation reduced from 25% to 15% to be marginally negative, but it
would be offset by lower corporate taxes.
¾ No change is service tax for the industry.
¾ A provision of Rs12bn for Universal Service Obligation (USO) Fund in 2005-06, 1,687
subdivisions to get support for rural household telephones, BSNL to provide public telephones
in the next three years to the remaining 66,822 revenue villages.
¾ Tax Holiday under section 80 IA extended
¾ Cut in custom duty on copper, optical fiber to benefit telecom operators.

Positive for- VSNL, Bharti Televentures

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Textile

¾ Investment in textile sector to be increased from Rs200bn in FY05 to Rs300bn in FY06.

¾ Reduction in customs duty on import of textile machinery from 20% to 10%
¾ 30 textile items will be dereserved – Knitting sector major beneficiary
¾ The extension of TUF’s to benefit the spinning units
¾ Major negative- no mention of labor reforms.

Positive for: Abhishek Industries, Welspun India.

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 Budget 2005-06

Sugar

¾ Sugar factories operational in the 2002-03 sugar-crushing season will be provided aid to recast
their debt positions.
¾ Loans will be available at 2ppt below the normal lending rates by the banks on loans
outstanding as on October 21, 2004
¾ Companies will be allowed to renegotiate debt
¾ Custom duty on molasses reduced from 15% to 10% and increase in excise duty on molasses
from Rs500/MT to Rs1,000/MT

Positive for – Bajaj Hindusthan, Balrampur Chini Mills and Ugar Sugars.

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Published in March 2005. © India Infoline Ltd 2004-5.

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