labels: industry - general, economy - general, governance, union budget 2006
Industry reacts: An Update news
28 February 2006

India Inc, has lauded P Chidambaram's proposals presented today in his Budget 2006-07 for the measures to introduce fiscal discipline and cut the deficit to 3.8 per cent. However, they expressed mixed views on the new tax proposals for the capital market.

B Muthuraman, managing director, Tata Steel
This year's Budget has laid stress on continuity of policies for sustaining the growth momentum in the economy. The FM has tried to put his programme on 'auto pilot', if I can borrow a term from the aviation industry. The containment of the fiscal deficit would keep the macro economic factors like exchange rate and interest rate under control, though high oil prices might have some effect on inflation rate.

The finance minister has taken cognizance of the hardships caused by fringe benefit tax (FBT) and has tried to address the issue in some way, although I feel it would have been much better if FBT was done away with, due to its complexities and potential for litigation. On MAT my view remains that there should be no tax, if by provisions of law, a corporate is not liable for tax otherwise.

De-blocking of coal blocks of 20-billion tonnes of coal is a welcome move. The Economic Survey had categorically pointed out that mining / coal sector has been lagging behind in the overall economic growth and hence some corrective measure is required for this sector. Finance minister has indicated that a comprehensive new policy on coal is being framed and we are hopeful that it will take care of the requirements of the steel industry too.

The focus on ultra mega power projects, increased outlay for national highways and rural roads as well as the allocation for the National Urban Renewal Mission will have positive impact on the infrastructure growth in the country and will give further impetus to the economy. Finance minister's intention to move to full GST regime by 2010 is a welcome move. I am personally quite happy that the government has intensified its effort to reach the benefits of growth to the general masses and underprivileged class.
We see this Budget as a step towards facilitating the economic growth in the country and rank it '7.5' on a scale of '10'.

Shikha Sharma, CEO and managing director, ICICI Prudential Life Insurance Company Limited
Life insurance and pensions is one of the fastest growing segments of the economy and has an important role to play in mobilizing long-term savings. The world over, pension and retiral savings are driven by tax exemptions, and the finance minister has recognised the need to have a suitable policy framework in India too. To this end, he has introduced two positive changes in the budget that will help individuals ensure their own post-retirement financial security, and further boost the growth of the pensions industry.

The first of this is the removal of the sub-limit of Rs10,000 for tax-free contributions to pension policies, thereby allowing individuals to save up to Rs 1 lakh towards such plans.

TV Mohandas Pai, chief financial officer, Infosys Technologies Ltd
Union Budget is that of consolidation and growth. However, the finance minister could have done more in terms of reducing the excise duty to 12 per cent from 16 per cent.

It is a good budget from a macro-economic point of view because the tax collection has gone up from 9.2 per cent of the GDP to 11.2 per cent in 4 years. For the IT sector the levy of eight per cent excise on packaged software is not good would hurt the education sector much more than anywhere else. However, the levy will not have any significant impact on Infosys as we can always download the software from the net, he added.

The rationalisation of FBT from 20 per cent to 5 per cent for tour and travel is welcome.

A Vellayan, director, Marketing, Murugappa Group
The target of 200 million food grains production with enhanced allocation to farm credit and self-help groups, and the short-term credit rate to farmers at 7 per cent are progressive measures. However, if the food grain production target is to be met, there needs to be an upward revision on fertiliser subsidies just to keep pace with the volume of fertilisers required to achieve this target.

On infrastructure, the commitment to complete the Golden Quadrilateral and revamping the National Highways Authority of India (NHAI) are positive developments. The plan to add 15,000MW of power and electrifying 10,000 villages is a progressive step.

On the indirect taxes, the rationalisation of the fringe benefit tax (FBT) will make it more practical and with no changes in rates and no new taxes, the only difference has been in the hiking up of MAT rates to 10 per cent from 7.5 per cent and the increase in security transaction tax by 25 per cent.

Satyanarayana M, CFO, Nipuna Services Limited
Two of the most important statements made by the finance minister are that [a] the tax-GDP ratio is going up and [b] that governmentt is not financing the Plan entirely out of borrowings. Tax-GDP ratio was 9.2 per cent in 2003-04 and is projected at 10.5 per cent for 2005-06.

On the indirect taxes front, service tax is of interest to ITES industry. The industry covers multiple and dissimilar services. It can be as simple as call centre process and data entry process or as complex as KPO and animation. There is no clarity on which of these services attract levy of service tax when these services are provided in India. With the proposed rate of service tax at 12 per cent, there is need for clarity on this subject.

On the direct taxes front one proposal is of interest: the fringe benefits tax [FBT]. FM really did not do much on the FBT except to reduce to rate of tax from 20 per cent to 5 per cent on travel expenditure.

Arvind Mathew, MD and president, Ford India
With respect to the excise duty reduction on small cars, we do believe that a level playing field is essential to encourage global manufacturers to participate more actively in India. An excise duty reduction across the board would have been aligned with India 's globalisation actions. Having said this, we expect that the duty reduction will increase the demand for small cars and in turn, the overall industry.

"The reduction in the custom duty will partly offset the inflationary impact of growing input material costs. While the changes in FBT rules are welcome, the compliance burden remains. Continuity of the income tax rates deliver a strong signal that we are entering the stability phase of the tax reforms, which is vital for the industry in the long term.

Ashank Desai, chairman, Mastek Limited
The levy of 4 per cent CVD on all imports and 8 per cent excise duty on packaged software are disappointing. The proposed changes in the FBT will not benefit the IT sector, because travel, which is a major expense for IT companies, is already at 5 per cent. The IT industry will benefit only marginally from the superannuation exemption up to Rs1lakh.

From the IT industry's perspective, there are four major areas of focus when it comes to the budget - investment in infrastructure (roads, airports, telecom and power); investment in education (the IT industry is a knowledge-intensive) investment in e-governance and rationalisation of taxes.

We have to invest more aggressively in education and e-governance and increase spending on education from 3.5 per cent of GDP to 4.5 per cent to meet the growing demands of industry, especially the IT sector.

The government must dedicate a percentage of its spending for investments in e-governance to help the government deliver better service and also boost the domestic IT industry.

Gautam Vir, CEO and MD, Development Credit Bank
I am neutral about the budget. Implementing a goods and service tax by 2010 is a brilliant idea. To achieve a 10 per cent growth the steps taken to provide liquidity are inadequate and interest rates are higher. On the money, credit and equity markets, the foremost positive is the return to aggressive fiscal consolidation; lower government borrowing should reduce the draft on lend-able resources and take the heat off interest rates for some time.

Secondly, a single, unified market for corporate bonds will bring in liquidity in this market and consequently, encourage more companies to raise money through the bond route. And, thirdly, the finance minister has finally signaled that the Indian banking system is strong enough to do away with the crutches of government support. Though I hope the finance minister will reconsider his stand on a service tax on ATM use, because ATMs are just another channel for banking. Loading a tax will be penalising

BVR Mohan Reddy, CMD Infotech Enterprises
This budget, while certainly a growth-oriented one, thrives more on consolidation of initiatives taken in the last two budgets than introduction of new policy initiatives. Levy of excise duty on computers and on packaged software will be detrimental both to domestic industry and educational / training institutes. Disappointed that there is no initiation of clarification on income tax related issues and simplification of tax procedures. No major announcements on employment generation initiatives or urban infrastructure creation are another disappointment.

Prashant Ruia, managing director, Essar Steel
The steel industry appreciates the intentions of the finance minister to make India a global hub for steel, but at the same time it hopes that these intentions will be converted into an action plan to enable this industry to achieve its full potential. There is a need for speedy allocation of captive mines of iron ore, on the lines of the policy announced for allocation of coal, in order to fulfill this objective.

The steel sector welcomes the duty corrections in the range of 2.5-3 per cent on iron ore, zinc, refractories and catalysts. However, the rate cuts are below our expectations and will have only a marginal impact on our costs.

Utpal Sengupta, president, Agro Tech Foods Ltd.
While the fine print is still being studied, I'd say it is on the whole a good budget. Most of the changes are moderate and along expected lines, showing we are maturing as an economy and following consistent policies. Deficit has been brought down while allocating higher funds for selective development efforts.

There is some disappointment that lowering of CST has been left for another day. One hopes that the day will come soon and we won't have to wait for another year

RC Mall, executive director, Andhra Pradesh Paper Mills
We welcome the initiative for indirect tax reforms in the form of moving towards GST concept. Thrust in rural fronts will bring rural populace into the mainstream of the economy. There will be more liquidity through foreign mutual fund investment in gilts thereby keeping a check on interest rates.

Paper industry has greater challenges to meet the national goals on education from the huge allocation of funds for Surva Siksha Abhiyan, in the field of education. The main constraint would be in the area of backward linkage of raw material sourcing.

Srinivas, Kodali, executive director, Priyadarshini Spinning Mills
In the last two years, the duty on fibre was more than the duty on yarn. Due to this, the excise duty paid on fibre could not be utilised fully toward the payment of excise duty on yarn. Duty accumulated has become cost to the industry. With the current change in excise, this additional cost will not be incurred anymore.

Simultaneously, reduction of excise duty on filament yarn from 16 per cent to 8 per cent will affect the spun yarn industry. Reduction of custom duty on fibre will reduce the cost of the raw material. It will encourage consumption of synthetic yarn.

Integrated Textile Parks (SITP) to encourage the garment industry. Minimum alternate tax (MAT) increase from 7.5 per cent to 10 per cent will be an additional burden on the industry.

Tarun Das, chief mentor, CII
The industry will be happy, as there are no major negatives. It has cut down custom duty and has covered lot of industries as well.

Arun Firodia, chairman, Kinetic Group
I am happy that finance minister has greatly enhanced budgetary allocations for rural, agri-business and food processing sectors. This will provide employment opportunities to rural people and stop their migration to cities.

India seems to have got on to Laffer curve where lower tax rate results in higher tax collections. The finance minister has done well not to tinker much with tax rates, which have yielded excellent results during the past one-year.

All members of the family need mobility and they will continue to buy two-wheelers. In fact the demand for two-wheelers from rural area will go up substantially. All in all it is a budget that is stability oriented.

Rajeev Chaba, president and managing director, General Motors, India
Overall the Budget looks to be a responsible one going forward. Some of the announcements made in the budget speech like renewed focus on infrastructure, especially, road development, power generation, rural credit, agriculture, irrigation, social infrastructure, introduction of GST by 2010 are all encouraging if these are implemented as promised.

The announcement on no new taxes being proposed in the Budget is also encouraging. However, no announcement on labour reforms has been made in the budget speech.

As far as the passenger car industry goes, the budget is not on expected lines. We expected the excise duties to come down for all cars and not only on small cars.

Other proposals on FBT, CST, MAT etc are also not on expected lines.

Nandan M. Nilekani, president, CEO and managing director, Infosys Technologies
It is encouraging to see India on the growth path. At an overall level, the fiscal deficit is being reined with a lower growth in non-plan expenditure which is a very significant aspect of this budget. Government spending will not be a strain on public savings. The move to increase investment in the social sector is welcome. We are happy to note the enhanced focus on infrastructure spending and the National Urban Renewal Mission.

On the IT front, the budget has been neutral. However the proposed 8% duty on over the counter packaged software impedes IT penetration to the vast majority of the masses. The review of FBT by removing certain genuine business expenditure from its purview is welcome. However the larger administrative issue that the industry is apprehensive about on FBT has not been addressed.

Sashi Krishnan, chief executive, Cholamandalam AMC
The budget is good for equity funds and the retail investors. Now bank fixed deposits will be eligible for tax deduction under Section 80C of the Income Tax Act. I don't think this will have an impact on the ELSS schemes, as the asset classes are different. Finance minister P Chidambaram also proposed removal of 10 per cent reciprocal shareholding and increased the ceiling by $1 million to $2 million on the aggregate investment by mutual funds in overseas instruments. The government also allows select mutual funds to invest up to $1 billion in overseas exchange traded funds.

It is good time for the retail investor to go in for equity funds of mutual funds.

Gopal Srinivasan, director, TVS Electronics Limited
The Union Budget 2006 announced today has finally put the local hardware manufacturing on a truly level playing field by bridging the gap between imports and local manufacture. By levying an excise duty of 12 per cent on personal computers and 16 per cent on set top box the two key drivers for growth of information, communication and technology (ICT) industry, the government has shown high understanding and commitment to grow local manufacturing.

Ninad Kapadia, MD, CA India and SAARC
Overall the budget is positive, well measured and aimed at long term development of the economy. The budget focuses a lot on investments in infrastructure, boosting education and improving healthcare which is good for the economy. The manufacturing sector is witnessing a higher growthrate and by announcing new projects for roads & power development, rural electrification, increasing outlay for PSEs, the manufacturing sector will
see increased activity.

The finance minister has also acknowledged the industries that are
potential stars of the Indian economy - Textiles, Petroleum products, Steel etc. Also, there are no major changes in tax structure which is good for continuation of GROWTH of the economy. In the end, the budget has set the tone for second level of growth and much will depend on how well it is executed.

Habil Khorakiwala, chairman, Wockhardt Group
The decision to aim for a uniform goods and services tax for the country is path breaking.

I am surprised at the deafening silence on the pharmaceuticals and healthcare sectors. My biggest disappointment is that there is nothing in the budget to promote R&D despite specific demand from the industry to increase the weighted deduction and to have it for a period of 10 to 15 years.

The minister was keen to reduce excise duty on dosa to 8 per cent from 16 per cent and on condensed milk to 0 per cent. But medicines will continue to attract 16 per cent duty. A reduction in excise would have made medicines more affordable to our people.

On the positive side, removal of FBT on samples to doctors is a step in the right direction. So is the reduction in duty on sale of goods from EOU to DTA. Reduction in duties on more AIDS and cancer drugs is welcome.

The budget is silent on biotechnology, which the minister referred to as a sunrise sector in last year's speech.Power generation has grown by only 4.7 per cent as against the GDP growth of 8 per cent and manufacturing sector growth of over 9 per cent. This is a dangerous trend and will increase the cost of power for the industry, making our industry less competitive.
My rating: 7.5 / 10

RN Mukhija, president (operations) Larsen & Toubro Limited
From the electrical industry point of view the budget makes a bold statement about addition of 35,000-40,000 MW in the next three years, of which, 5,000mw will be added in 2005-06 and 15,000mw by March 2007. This spells out a remarkable progress.

Further, electrification of 10,600 villages in 2005-06 and 40,000 villages in 2006-07 is a heartening step of committed progress in rural infrastructure development. The ultra mega power projects should help ease power requirements in states like Maharashtra, Gujarat, Karnataka, Madhya Pradesh and Chattisgarh.

Benefits under section 80IA of the IT act is extended up to March 2010 for ultra mega projects and up to March 2009 for others. This will attract further investment in the power sector.

Policy changes to attract more FDI in infrastructure will have a positive effect power sector.

Continued focus on non-conventional energy is encouraging for the power sector.

Reduction in peak rate of custom duty from 15 per cent to 12.5 per cent will encourage imports by MNCs operating in India. This will intensify competition. Reduction of customs duty on steel, ferrous and non-ferrous metals from 10 per cent to 7.5 per cent is a welcome step, which will reduce the input cost.

Reduction of FBT on superannuation fund as well as tours and travels contribution is welcome, but does not meet expectation of the industry.

Mehernosh Randeria, VP, Finance & Marketing, Legrand (India)
An overall positive budget with a thrust to improve the rural purchasing power and infrastructure development.

D Datar, vice president, corporate affairs, Man Industries (India) Ltd
With customs duty cut for pipelines and positive for oil companies the budget is good considering long term perspective of economic growth.

However, for exporters, service tax paid on transportation is still not available as Modvat. The impact on exporters is huge and we were hopeful that this anomaly will be addressed in this time.

B Ramalinga Raju, chairman and founder, Satyam Computer Services Limited
It is a satisfactory budget that reinforces the goals of "Bharat Nirman". While the emphasis on infrastructure is encouraging, there is definitely an urgency to move fast in areas such as urban development and power in order to keep pace with the growing economy.

The budget has largely been neutral for the IT services sector though the stress on infrastructure and education should be positive for the industry from a long term perspective. The imposition of 8 per cent excise duty on packaged software and the increase in service tax, apart from bringing items like international air travel under the service tax ambit, are dampeners that could have been best avoided.

Harsh Mariwala, chairman and managing director, Marico Ltd
The Budget reflects a greater sense of fiscal responsibility and discipline. It reveals a quiet confidence to get on with reforms, and build upon the robust platform set up by the encouraging macro-economic data, while retaining the broad economic and fiscal framework.

It is good that the finance minister has set April 2010 as the deadline for GST (goods and service tax). However, there has been no announcement on the much-awaited reduction in CST.

Lower excise duties will benefit some segments of the FMCG Sector such as aerated drinks, ice cream, condensed milk, etc. On the whole, the sector would be happy that there has been no discrimination against branded products and services. But, it would have been better if the government had come out clearly for promotion of the branded goods and service sector.

Milind Sarwate, CFO, Marico Ltd
There are a few negatives too such as increased MAT (although it can be set off against future taxes), fresh CVD of 4 per cent on imports, increase in the service tax rate from 10 per cent to 12 per cent.

The money markets may not like the increased STT, but would welcome the corporate debt trading facility, as also the enhanced limits for both, FII investments in India and Indian mutual fund investments abroad. These may indirectly help the corporate sector.

The distinct move towards an integrated tax administration will hopefully address the current systemic unfairness against the organised sector, which has been fiscally diligent. With the reduced rate of custom duty, we may be close to the end of the journey towards getting India at par with the rest of the world.

Alekhya Talapatra, country manager, defence and security, public sector sales, customer solutions group, Hewlett Packard India
From pure IT hardware and packaged software perspective, the levies like excise duty increase will have a direct implication on the prices unless the companies decide to absorb it in the benefit of the consumers. As far as the defence sector is concerned, there is a higher outlay for telecom projects which translates to more connectivity led projects and more deployment of IT. Higher investments in rural sector, health, education and infrastructure vertical will contribute towards increased IT spending. This augurs well for vendors targeting these verticals and the IT industry in general.

Rahul Gupta, vice chairman, Storage Networking Industry Association
The finance minister has tried to introduce a balance budget between local manufacturing and importers but there are still several aspects that need clarifications. I do not see customers benefiting much on the prices of IT products. However, despite all odds, the IT industry is poised to grow in the year 2006-2007.

Javed Tapia, president, Red Hat Indian Subcontinent
Specifically for the IT Industry the imposition of 8 per cent excise duty on packaged software is a dampener and will cause an increase in prices of legal software. Also the imposition of excise duty of 12 per cent on computers needs to be studied from an impact perspective since the FM has said that
there will be no increase in cost due to this.

Rahul Mehta, vice-president, Clothing Manufacturers Association of India (CMAI) and managing director, Creative Group
My reading is that the honourable finance minister has once again done what he has developed a genius for - giving with one hand and taking back with the other!

The reduction of import duties from 15 per cent to 10 per cent, a welcome step, has to be viewed along with the imposition of an across the board levy of 4 per cent CVD, which more than nullifies the reduction in import duty.

The reduction of excise duties in man- made fibres and yarns from 16 per cent to 8 per cent is the best part of the Budget. This has also to be seen in the context of 2 per cent cess being re-introduced on these items.

The introduction of a Handloom Mark and the setting up of a jute technology mission are very positive steps taken, and if implemented quickly and efficiently, will help strengthening these traditional sectors.

Increased allocation to TUF and textile parks is also a step in the right direction, though widely anticipated.

In his speech the FM mentioned the importance of merchandise exports, but did not follow through with any announcements on this segment, so one really does not know what he has in mind.

Sandip Raichura, senior manager, research and business development, Cholamandalam Distribution Services Limited
The one surprising exception was no major announcement on the oil and gas sector -except that states will be forced into subsidising LPG for domestic use- and also a reference to the potential of NELP 6 for pipeline and refinery companies.

The finance minister, with a gross budgetary support of Rs1.72 lakh crore, which is 20.4 per cent higher than the previous year, seems to be hoping for continuing good growth in the next fiscal year. The impact on debt markets is likely to be negatively biased unless rating agencies find the numbers appealing and possible and come out with positive announcements on upgrades in the next few days.

An unwinding of Rs22,000 crore worth of bonds, issued by PSUs, is likely to enter the markets in the year and may cause pressure - besides the ongoing borrowings of the government which have been estimated higher.

For the individual investors the hike in service tax and the 25 per cent across the board increase in the securities transaction taxes will have a moderately negative impact on costs, especially insurance premia.

The option to invest in bank fixed deposits for deductions under Sec 80 C may weaken demand for ELSS schemes though at the same time, increased 80CCC benefit to Rs1 lakh will increase demand for pension plans.

A negative surprise was the non removal /reduction of dividend distribution taxes on debt funds and the inclusion of long term capital gains in the MAT provision for corporates. The reduction in number of companies offering Sec 54EC bonds may also see a downward pressure in interest rates from these two organizations, viz, NHAI and REC.

Mutual funds have been given some additional sops to innovate by removing the 10 per cent limit on international investments (no reciprocal shareholding required) and a general permission to invest collectively upto $1 billion in internationally traded exchange funds.

Nani Javeri, CEO, Birla Sun Life Insurance Company Limited
The budget re-emphasises on the need for higher investment in the infrastructure, education and rural sectors for meeting the high GDP growth target set by the prime minister. The continued thrust on fiscal deficit management to meet commitment under the FRBM Act is very positive.

The specific announcements towards increase in limit of exemption for contribution to pension products and exemption from FBT for contribution to superannuation funds up to a sum of Rs1 lakh pa are welcome steps for the life insurance industry.

Jignesh Shah, MD and CEO, Multi Commodity Exchange of India Ltd
The government has made allocation of Rs50 crore for modern terminal market being initiated by the ministry of agriculture that will benefit the farmers by providing them a modern market mechanism close to their place of production.

Banks could use warehousing based secured lending mechanism to deliver credit to farmers at 7 per cent. We were expecting: Infrastructure status for commodity exchanges and related eco-system institutions, like warehousing companies; allowing physical market profit or loss to be offset against derivative contracts, loss or profit, on electronic, auditable, national-level commodity exchanges in line with the practice in stock exchanges; FCRA amendments allowing options trading, emissions and indices trading as also converting warehouse receipts into negotiable instruments; allowing participation of banks, foreign trading companies and mutual funds in commodities exchanges and granting autonomy to the regulator, FMC, similar to the status of SEBI in the capital markets.

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Industry reacts: An Update