The Union Budget, to be presented on February 28, will be keenly watched as a test of the government's commitment to fiscal responsibility -- whether there is a credible plan for reducing the deficit and also whether populist measures can be avoided before the general election in 2014, according to a pre-Budget note from Goldman Sachs.
While Finance Minister P. Chidambaram is likely to announce a central government deficit target of 4.8 per cent of the gross domestic product (GDP) for FY14, the credibility on how to achieve this target will be key.
"We think the budget will focus on expenditure cuts -- which have a better chance of succeeding, in our view -- rather than an optimistic revenue increase," Goldman said in the report.
SECTORAL EXPECTATIONS
Automobiles: No significant action is expected, given the deterioration in demand conditions for the sector, coupled with the government's fiscal deficit constraints and the recent hikes in fuel prices.
Banks and financial institutions: Details of capital infusion into banks awaited. The budget could be a positive for banks which are due to receive capital. There may be a possible boost to savings instruments such as insurance and mutual funds to diversify funds away from gold.
Capital goods: One of these measures to support the power equipment industry are likely -- (1) exemption of import duty on CRGO (key raw material used in transformers), (2) anti-dumping duty on imported equipment, or (3) exemption of power equipment from excise duty, assuming them as deemed exports. Also, there may be an excise duty exemption on cement and steel used for mega power projects.
Consumer goods: A 10-12 per cent increase in excise duty on cigarettes is likely. While a hike of 8-10 per cent could be recovered by companies, a greater increase may negatively impact volumes. There may be some commentary on the potential increase in excise/service tax rates after the government raised them from 10 per cent to 12 per cent in the last Budget. This may further slow down consumption, as has been witnessed particularly in the discretionary categories.
Infrastructure: Exemption of infrastructure companies from having to pay minimum alternative tax (MAT)-- something the industry has been lobbying for. The profit-linked incentive in infrastructure projects will be replaced by investment-linked incentive (i.e., investment allowance regime).
Information technology: Clarification on the special economic zone (SEZ) regime regarding tax exemption of units set up in new SEZs under the Direct Tax Code (DTC).
Logistics: A firmer road map for the implementation of the Goods and Services Tax (GST) over the next 12 months.
Oil and gas: Increased government provision for oil subsidy, since Rs 48,500 crore from FY13 is slipping into FY14. Market concerns over export parity pricing of diesel. Likely rejig of petroleum duty structure if import duty on oil is introduced. With aggressive fiscal deficit targets, the latter cannot be ruled out.
Real estate: Incentives for affordable housing such as an increase in the limit for income tax deduction on interest rate on (1) home loans (current limit: Rs 1.5 lakh) and/or (2) home loan principal payments (current limit: Rs 1 lakh).
Telecommunication: The government may look to generate approximately Rs. 1,000-1,200 crore (similar amount as budgeted in FY13) from the excess 2G spectrum/2G spectrum and 900 MHz refarming.
Utilities: Extension of tax holiday under Section 80IA for another five years. Currently, infrastructure projects are entitled to a tax holiday of 10 consecutive years for the first 15-20 years of operation. Provisions to incentivize state electricity distribution companies to reduce the transmission and distribution (T&D) losses. Increased SOPs to renewable energy industry through viability gap funding and risk guarantees, increase in national spending on renewable energy.
While Finance Minister P. Chidambaram is likely to announce a central government deficit target of 4.8 per cent of the gross domestic product (GDP) for FY14, the credibility on how to achieve this target will be key.
"We think the budget will focus on expenditure cuts -- which have a better chance of succeeding, in our view -- rather than an optimistic revenue increase," Goldman said in the report.
SECTORAL EXPECTATIONS
Automobiles: No significant action is expected, given the deterioration in demand conditions for the sector, coupled with the government's fiscal deficit constraints and the recent hikes in fuel prices.
Banks and financial institutions: Details of capital infusion into banks awaited. The budget could be a positive for banks which are due to receive capital. There may be a possible boost to savings instruments such as insurance and mutual funds to diversify funds away from gold.
Capital goods: One of these measures to support the power equipment industry are likely -- (1) exemption of import duty on CRGO (key raw material used in transformers), (2) anti-dumping duty on imported equipment, or (3) exemption of power equipment from excise duty, assuming them as deemed exports. Also, there may be an excise duty exemption on cement and steel used for mega power projects.
Consumer goods: A 10-12 per cent increase in excise duty on cigarettes is likely. While a hike of 8-10 per cent could be recovered by companies, a greater increase may negatively impact volumes. There may be some commentary on the potential increase in excise/service tax rates after the government raised them from 10 per cent to 12 per cent in the last Budget. This may further slow down consumption, as has been witnessed particularly in the discretionary categories.
Infrastructure: Exemption of infrastructure companies from having to pay minimum alternative tax (MAT)-- something the industry has been lobbying for. The profit-linked incentive in infrastructure projects will be replaced by investment-linked incentive (i.e., investment allowance regime).
Information technology: Clarification on the special economic zone (SEZ) regime regarding tax exemption of units set up in new SEZs under the Direct Tax Code (DTC).
Logistics: A firmer road map for the implementation of the Goods and Services Tax (GST) over the next 12 months.
Oil and gas: Increased government provision for oil subsidy, since Rs 48,500 crore from FY13 is slipping into FY14. Market concerns over export parity pricing of diesel. Likely rejig of petroleum duty structure if import duty on oil is introduced. With aggressive fiscal deficit targets, the latter cannot be ruled out.
Real estate: Incentives for affordable housing such as an increase in the limit for income tax deduction on interest rate on (1) home loans (current limit: Rs 1.5 lakh) and/or (2) home loan principal payments (current limit: Rs 1 lakh).
Telecommunication: The government may look to generate approximately Rs. 1,000-1,200 crore (similar amount as budgeted in FY13) from the excess 2G spectrum/2G spectrum and 900 MHz refarming.
Utilities: Extension of tax holiday under Section 80IA for another five years. Currently, infrastructure projects are entitled to a tax holiday of 10 consecutive years for the first 15-20 years of operation. Provisions to incentivize state electricity distribution companies to reduce the transmission and distribution (T&D) losses. Increased SOPs to renewable energy industry through viability gap funding and risk guarantees, increase in national spending on renewable energy.
