Tuesday, March 1, 2011

Budget 2011: What it means for the investors

Cap on voting rights in pvt banks to go
Laws may be changed to scrap the 10% cap on voting rights in private banks and allow holding companies to own banks. This will help business houses lobbying for a banking licence. The FM also hinted at tabling the Bill to allow 49% FDI in insurance firms, but few think it will happen in a hurry.

High premium, less bonus for policyholders
Premium on life insurance policies will rise. For every Rs 100 premium, there will be a tax of 15 paise. This will mean that policyholders will receive less bonus — the return that policyholders receive. The new rule applies to all endowment policies.

High DDT for money market, debt funds
Money market and debt funds will pay a higher dividend distribution tax (DDT) for investments made by firms. DDT will rise to 30% from 25%, but stay unchanged at 12% for individual investors. Banks will be happy as a higher DDT will place these MF plans on par with fixed deposits.

Easier to meet priority sector targets
Banks will find it easier to meet priority sector targets as home loans up to Rs 25 lakh (as against Rs 20 lakh) will qualify for this. Also, lending to farmers is expected to go up as borrowers with a good repayment record will be charged 3% (as against 2%) lower than the floor rate.

Excise levy on food mixes
An excise levy of 1% will be imposed on items such as coffee and tea pre-mixes, sauces, ketchup, soups and broths, fruit pulp, fruit juice-based drinks, food mixes, ready-to-eat packaged foods and toothpowders. Since the levy is small, it will not trigger price increases.

Hospital, medical bills to rise
Medical bills, including diagnostic tests, will be 5% higher at private hospitals as the government brings these under the service tax net.

Now pay more for air travel
Passengers to pay Rs 50 more on domestic air travel and Rs 250 on foreign travel because of a 2% increase in service tax.

Branded garments to cost more
Branded garments to cost a tenth more as retailers plan to pass on the 10% excise levy on such clothes to consumers.

Food bills, hotel tariffs slither up
Eating out in restaurants serving liquor will become 3% costlier. Staying in hotels with room rents higher than Rs 1,000 will become 5% more expensive.

Excise on sanitary napkins slashed
Excise on sanitary napkins and diapers cut to 1% from 10%. Prices unlikely to come down.

Financial reforms get going
A big push for financial sector reforms, on hold for the last 6 years. Laws to raise overseas investment in insurance to 49% from 26%, hike the share capital of India’s largest life insurer, LIC, from Rs Rs Rs Rs 5 crore to Rs 100 crore are on the anvil. So are two new Bills to create a pension fund regulator and to reform archaic banking laws. Intentions are fine, but will the government have the majority in the Rajya Sabha to push these reforms through?

Divestment to boost revenue
The exchequer will end up with Rs 22,144 crore after selling stakes in PSUs this fiscal. While stake sales in ONGC and SAIL could happen this year, the proceeds from the SAIL sale could go on the government’s books next year. Next year’s target is Rs 40,000 crore, with stakes of several PSUs including PFC on the block. If successful, these sales could help the FM meet his tight deficit targets.

Towards a leaner debt profile
The government seems to be on track in its mission to reduce public debt as a percentage of GDP. It has set next year’s target at 44.2%, much lower that the 52.5% target of the 13th Finance Commission

PCs likely to cost more
The levy of 5% excise duty on microprocessors as well as DVD writers is likely to make PCs costlier. AMD said that instability in policy is not good for the industry. Intel says it’s still reading the fine print, but a marginal price rise may be imminent.

Sops on mobile phone parts to continue
No hike in customs duty of 5% on mobile phone parts, as was widely expected, will give local manufacturers some relief. Full exemption from special additional customs duty on handset components and accessories will help lower costs marginally.

Nokia to increase prices marginally
Phone maker Nokia is expected to pass on the 1% increase in central excise to customers, but other phone makers say it is too small a number and are not expected to do anything. Nokia phones may cost Rs 100-200 more.

Push for rural broadband, but will it work?
Rural broadband has got a big push, but earlier efforts have not clicked. The government planned to set up 2,50,000 citizen service centres in villages to drive e-governance. Many of the one lakh CSCs that were set up have shut down, raising questions about the model. 

Cement prices will rise, say dealers
The government has added a fixed excise duty of Rs Rs 160 per tonne on cement and reduced Customs duty on petcoke and gypsum, key inputs for the sector. Cement dealers and stockists say the price of a 50 kg bag is likely to go up by Rs 5 from March 1.

Tax on iron ore exports to improve domestic supplies
Tax on iron ore exports increased to 20% from 15%. This is expected to improve domestic supplies and arrest rising input costs of steelmakers.

Full export duty exemption to iron ore pellets to encourage the value-addition process.

Foreign investors can now invest more
Big boost to infrastructure as more foreign funds allowed to invest in the sector. Allocation raised by nearly a quarter to Rs 2,14,000 crore. Further, government bodies can issue tax-free bonds adding up to Rs 30,000 crore.

No major cut, but some relief
The cut in surcharge on corporate tax for domestic firms will bring down their overall tax rate by 0.77%. Though this is not a major reduction, it is a welcome relief. Also, the minimum alternate tax has been raised marginally to off-set the reduction in surcharge, meant to be a temporary levy. Surcharge will end once the DTC kicks in by April 2012.

Lower tax on foreign dividends
With the aim of providing incentives to domestic firms to repatriate money from their overseas subsidiaries, the Budget has halved the rate of tax on dividends received by a company from its foreign subsidiary to 15%. This will encourage local companies to bring back cash from their overseas arms. Joint ventures, where an Indian company owns less than 50% equity, will not enjoy the concessions.

Transfer pricing norms tweaked
Multinational companies doing business in the country will find it tough to shift hefty profits to off-shore group firms to escape tax. The tax department will now have additional powers to clamp down on MNCs mis-pricing products or services. But disputes could come down once the government fixes a markup or acceptable deviation from the market price.

Tax break for cheaper foreign funds
Debt funds for financing infrastructure will get tax exemptions. The government is betting big on cheaper overseas funds, with FII investment cap in corporate bonds of infrastructure firms raised from $5 billion to $25 billion. NRIs and others investing in infrastructure funds will now enjoy a lower withholding tax of 5%, encouraging them to bring back the money they may be holding on behalf of residents.

Garment industry to take a hit
Branded readymade garments and textile made-ups now face a mandatory central excise rate of 10%. However, manufacturers can avail credit of tax paid on inputs, capital goods and input services. According to the industry the move will lead to increase in prices of branded retail garments and made-ups as there is no scope for a duty credit for the imposed duty.

FMCG, pharma firms to pay more taxes
Companies such as ITC, Hindustan Unilever and pharma companies will face pressure on the bottomlines because of imposition of excise duty. Packaged food to attract a 1% excise duty. Vaccine makers to also face 1% excise duty sans cenvat credit facility. Medicaments, intravenous fluids and surgical gloves manufacturers to face 5% excise duty.

A dampener for hospitality sector
Hotel accommodation above Rs 1,000 per night will now be charged a 5% service tax. Similarly, air-conditioned restaurants serving liquor will be charged 3% service tax as well. And while the brunt of both these tax changes will ultimately fall on the consumer, industry observers say the new rates could well turn away foreign tourists.

Not something the doctor ordered
All private air-conditioned hospitals with more than 25 beds will face 5% tax on their services. This will increase cost of health care in most corporate hospital chains. Health-care providers such as Apollo Hospitals, Fortis Healthcare, Manipal Healthcare, Super Religare Laboratories may have to bear the brunt of service tax or pass it on to consumers. Bottomline of these providers is likely to be impacted.

Source: ET   

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