RPG Life Science Limited (RPGLS)

Union Budget – FY 2011-12

Overall Impression:
 Overall, it is a good growth-oriented budget although, it lacks any great intellectual
architecture that could alter and / or accelerate the course of Indian economy amidst highly
disturbing national and global socio-politico-economic state of affairs.
 A number of adverse factors could jeopardise ambitious looking budget estimates for growth
in tax and non-tax revenues considering spiraling prices of crude oil because of fallout of
political disturbances brewing in dictatorial nations & other commodities in view of supply
side constraints. These could make it difficult to contain subsidies on food, fuel and fertilisers
and yet be able to bring down fiscal deficit to 4.6% in FY 12 and gradually to 4.1% in FY 13
and further down to 3.5% in FY 14.
Positive Features of budget:
 Not raising peak rate of excise, customs and service tax rates in a hurry to rollback earlier
fiscal stimuli. However, minimum rate of excise of 4% in respect of certain specific products
has been raised to 5%.
 Increasing direct tax exemption limit helps keep more purchasing power with consumers,
which could assist in stepping up consumption, saving rates and help in capital formation.
 Reiteration about issuing new banking licenses to private sector corporates and that RBI
would formulate necessary guidelines for the same (although, in last one year, no concrete
action was taken).
 To attract foreign funds for financing infrastructure, a SPV structure is proposed with TDS
obligation on interest payment by the infrastructure debt fund reduced from 20% to 5% and
exempting income of the infrastructure debt fund from tax.
 All subsidies related liabilities are now brought under fiscal accounts to avoid issuing bonds to
oil and fertiliser companies in lieu of cash, which used to strain their balance sheets as also,
expose them to MTM risks in an increasing interest rate phase.
 Intention to eventually move towards direct transfer of cash subsidy to people living below
poverty line in a phased manner for kerosene and fertilisers would benefit government to plug
the leakages.
 Resolve to Direct Tax Code effective from April 1, 2012.
Negative features of budget:
 Stickiness of Government's revenue deficit at 3.4% of GDP in FY 11 and in FY 12 is quite
high, as it forces government to tap more debt (Rs 343,000 crore in FY 12), which in turn,
curtails liquidity from the system and weighs heavily in hardening lending rates, ultimately
slowing down investment cycle by private sector.
 Unable to make headway in time-bound introduction of Common Goods & Services Tax Act
in view of divergent views of centre and some states. However, a Constitutional Amendment
Bill will be introduced in this budget session to pave way for introduction of GST.
Expectations belied:
 Not a reformist budget as:
 No road map spelt out for liberalizing FDI limit in Insurance sector beyond 26% now, and
allowing FDI in multi-brand format retail segments.
 No concrete action plan for addressing governance / corruption related issues.
Capital Market perspective:
 Corporate surcharge reduction from 7.5% to 5% will leave more resources available with
companies for either distributing higher dividends and / or plough back funds for future
growth.
 Allowing foreign nationals (in addition to FIIs and NRIs at present) to invest in equity-based
mutual funds can attract lot of new capital in Indian equity market.
 Enhancing FII limit for investment in bonds issued by companies in infrastructure sector, with
residual maturity of over 5 years, from US $ 5 billion to US $ 25 billion, will raise total limit
available to FIIs for investment in corporate bonds to US $ 40 billion. This will help in
tapping long-term funds for infrastructure projects.
 A final decision after debate to extending nutrient based subsidy scheme to cover urea also
would go a long way in enhancing farm productivity and benefit fertiliser companies.
 Fertiliser companies would also be able to claim 100% deduction in respect of capital
expenditure made for production of fertilisers in India.
 Continuing with selective PSU divestment with target to mobilise Rs 40,000 crore in FY 12, in
addition to Rs 22,145 crore raised in FY 11 (against target of Rs 40,000 crore).
Conclusion:
Fiscal consolidation as spelt out, supported by timely improvement in supply side constraints
should help tame inflation at manageable levels. Otherwise, under unavoidable influence of global
tightening of prices of crude oil, commodities, metals, etc., forecast GDP growth rate, outgo of
subsidies and consequently, revenue & fiscal deficits targets could all go out of gear.

February 28, 2011

Encl:
Annexure I: Important Direct Tax proposals
Annexure II: Important Indirect Tax proposals
 Annexure I

Direct Tax proposals

Corporate Tax

 No changes made in Corporate Tax rates, which remains at 30%.

 Surcharge on Taxes for Domestic Company reduced to 5% from 7.5%, reducing overall tax
rate by 0.7725%.

 Minimum Alternate Tax (MAT) marginally increased to 18.5% of book profits from 18%.
LLP and SEZ are now covered under MAT.

 Investment linked tax incentive by way of allowing 100% deduction in respect of capital
expenditure incurred for production of fertilizer in India and developing & building housing
project under a scheme for affordable housing framed by central government.

 Sunset clause of tax deduction under sec 80 IA for Power sector and under sec 80-IB for
Mineral oil extended by one more year.

 Dividend received from foreign subsidiaries by the Indian holding company will be taxed at
15% on gross basis as against at full rate 30%.

Individual Tax

 Basic exemption limit raised by Rs 20,000/- to Rs 180,000/-.

 Age limit for senior citizens lowered to 60 years from 65 years and basic exemption limit
raised from Rs 240,000 to Rs 250,000

 Higher basic exemption of Rs 500,000 for very senior citizens above 80 years.

 Additional deduction of Rs 20,000/- U/s 80 CCF for investment in long-term infrastructure

bonds is extended for one more year.

*********
 Annexure – II
Indirect Tax and Service Tax proposals
Excise Proposals - General Peak rate
unchanged @ 10%
Concessional rate of excise duty increased from 4% to
5%
Excise duty of 1% (earlier, NIL) imposed on 130 items
Excise duty of 10% (on 60% of MRP) imposed on
branded readymade garments
Excise duty exempted for Air-conditioning equipments
for cold chain infrastructure
Excise duty exempted on goods for mega / ultra mega
power project
Change in excise duty from specific to ad valorem for
Cement Industry
Excise duty reduced to 1% (10%) on Sanitary napkins,
baby & clinical diapers
Excise duty imposed on branded Jewellery and branded
articles of precious metals
Service Tax - Rate of 10% unchanged
Service tax imposed on Hotel industry with room rate >
Rs. 1,000 per day
Service tax imposed on diagnostic services
Custom Duty - General Peak rate unchanged @ 10%
Reduction in custom Duty on specified agricultural
machinery & its components to 2.5%
Custom duty reduction from 7.5% to 5% on Micro
irrigation equipments
Custom Duty fully exempt for specified parts of hybrid
vehicles
Full exemption of Custom Duty on electronic
components for PC & Mobile phone handsets
Unified Export duty on iron ore exports lumps and iron
ore fines @ 20%
Custom duty reduced to 2.5% (5%) on Carbon Black
feed stock
Impact
Negatively impact all pharmaceutical
companies, paper industry, and packaged food
companies
Negative impact across sectors
Negatively affect Arvind Mills, Siyaram, ITC,
AB Nuvo
Positive for Blue Star
Positive for BHEL, L&T, Bharat Forge, JSW
Energy, Thermax, Alstom, etc.
Overall negative for most cement companies
Positive for P&G Health and Hygiene, Godrej
Negatively impact Titan and other Jewellery
companies
Negatively impact most of the hotel companies
Negatively impact Fortis Healthcare, Apollo
Hospital, Max
Negatively impact Escorts, VST Tillers, etc.
Negatively impact Jain Irrigation, EPC
Industries, etc.
Positive impact on M&M
Positive impact on Omnitech, HCL Info
System, Zenith Computers, etc.
Negatively impact Sesa Goa,
Positively impact AB Nuvo, Philips Carbon.
Negative for Himadri Chemicals
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February 28, 2011