Union Budget :- A Special Report By CapitalHeight

UNION BUDGET 2011 – KEY HIGHLIGHTS

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Tax Exemptions
The exemption limit for the general category of individual tax payers has been
enhanced to Rs 1, 80,000 from Rs. 1,60,000 in the General Budget 2011-12. The
measure will provide a uniform tax relief of Rs 2,000 to every tax payer of this category,
besides moving closer to Direct Tax Code (DTC) rates. Qualifying age for Senior
Citizens has been reduced from 65 years to 60 years and exemption limit for Senior
Citizens has been enhanced from Rs 2, 40,000 to Rs 2,50,000. A new category of Very
Senior Citizens, 80 years and above has been created who will be eligible for a higher
exemption limit of Rs 5, 00,000.

Power Sector enjoys duty exemption
The power sector has been one of the biggest underperformers in recent times. The
biggest indicator of a poor track record is their inability to meet targets on the power
generation capacity additions. Variance with the target has been as high as 50% in the
past. Equipment shortages have been a significant reason for India missing its capacity
addition targets. Capital goods imported for the expansion of existing mega or ultra
mega power projects enjoy a concessional basic customs duty of 2.5% and full
exemption from CVD. This creates a disability for the domestic suppliers who are
required to pay Central Excise duty on supplies to such projects.

Indian power equipment manufacturers have been demanding imposition of customs
duty to ensure a level-playing field vis-à-vis foreign manufacturers, while power project
developers have been lobbying against it on fears the move will dry up supply of
cheaper equipment in the market. Indian power sector expects the government to
continue its thrust on infrastructure and pins its hopes on incentives for the renewable
energy sector. Tax holiday was announced for power companies under section 80-IA
(4) was extended by one-year. This would encourage faster addition of power plants in

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the country and help in addressing the power scarcity faced by the country. This will
also benefit all the power generation companies which are currently expanding its
capacities. Power utilities, whose new power plants are delayed and would get
completed between March 2011 and March 2012, will be benefited. The minimum
alternate tax or MAT rate was raised to 18.5% from 18%. This would impact the
profitability of private power utilities. However, it is a nominal increase compared to the
expected hike of 20%.

Boost for Infrastructure Space
FM has planned an allocation of Rs 2.14 lakh crore towards developing the country's
infrastructure in the next fiscal. To enhance the flow of funds to the infrastructure sector,
the FII limit for investment in corporate bonds, with residual maturity of over five years
issued by companies in infrastructure sector, is being raised by an additional limit of
USD 20 billion taking the limit to USD 25 billion, raising the total limit available to FIIs for
investment in corporate bonds to USD 40 billion. Since most companies in the sector
are organized in the form of SPVs, FIIs would now be permitted to invest in unlisted
bonds with a minimum lock-in period of three years. To attract foreign funds for
infrastructure financing, the FM has proposed to create special vehicles in the form of
notified infrastructure debt funds. Interest payments on the borrowings of these funds
will have a reduced withholding tax rate of 5% instead of the current rate of 20%, while
full exemption of income of the fund from tax has been proposed. In addition, Mukherjee
also proposed tax free bonds of Rs 30,000 crore for the enhancement of infrastructure
in railways, ports, housing, and highways. India Infrastructure Finance Company Limited
or IIFCL is expected to achieve a disbursement target of Rs 20,000 crore by March 31,
2011 and Rs 25,000 crore by March 31, 2012. The take-out financing scheme
announced in the Budget 2009-10 has been implemented and seven projects have


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been sanctioned with a debt of Rs 1,500 crore. Another Rs 5,000 crore will be
sanctioned during 2011-12. As expected higher fund allocation across infrastructure
development scheme Bharat Nirman has been proposed. Allocation to the tune of Rs
58,000 crore has been planned for the scheme, an increase of Rs 10,000 crore from the
current year. Mukherjee also revealed that the take-out financing scheme announced in
the last budget has been implemented and seven projects had been sanctioned with a
debt of Rs 1,500 crore. Another Rs 5,000 crore has been proposed to be sanctioned
during 2011-12. He also proposed infrastructure status for cold storage chains, which is
expected to make both domestic and global retail chains happy.

Also, capital investments in the fertilizer sector have been proposed to be given
infrastructure status. He further stressed on the endeavor to develop the public private
partnership. Full exemption from basic customs duty has been extended to bio-asphalt,
an emerging green technology for the surfacing of roads, and specified machinery for its
application in the construction of national highways. Tunnel-boring machines required
for the construction of highways are also being included in this exemption. The
finance minister also proposed to raise the corpus of rural infrastructure development
fund from Rs 16,000 crore to Rs 18,000 crore. Tax sops in infrastructure investment up
to Rs 20,000 has been extended by a further one year.

Disappoints Capital Goods Space
The capital goods industry has witnessed a dramatic slowdown in recent times due to
the inability of the local manufacturers to meet the growing demand, while their Chinese
counterparts sell equipment which is relatively inexpensive and readily available.
Chinese equipment makers, much like other exporters from China, also benefit from the
low interest rates and an undervalued currency to boost exports. Amidst the backdrop of
the ongoing capacity expansions, the Indian power equipment manufacturers have


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been demanding imposition of customs duty to ensure a level playing field, while the
IPP developers have been lobbying for cheaper imports.

Capital goods sector was also expecting high worth orders from steel segment leading
to an increase in its backlog since the steel sector is planning to increase capital
expenditure on plants. Huge mismatch in demand and supply of power sector would
claim for setting up more power plans, a positive trigger for capital goods. The BTG
capacities in India have been increasing significantly during the last year post the
expansions undertaken by BHEL and Larsen & Toubro. In addition, companies like
BGR Energy, Thermax and Bharat Forge are also in the midst of setting up new
facilities for manufacturing power equipment. However, the budget turned out to be a
disappointing for the capital goods space as most of its expectations were not met.

No Network for Telecom Sector
FM announced a slew of sops in Budget 2011 but none of them ring a bell with the
telecom sector. The Finance Minister increased the Minimum Alternate Tax (MAT) to
18.5% from 18% last fiscal. This would increase the tax burden on most telecom
companies. The industry had hoped for an exemption of service tax on broadband.
However, Mukherjee made no such announcement. Infact, the FM added more services
to the tax net this budget in a bid to ensure a smooth transition toward GST. This move
would have significantly increased the penetration of household broadband connections
that would help boost revenues for broadband service provider companies.

India’s telecom sector is one of the world’s fastest growing sectors and is on the verge
of becoming the world’s second largest telecom sector. The number of mobile
subscribers stands at 752.19 mn in December 2010. Companies are expected to roll out


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3G services but the traction generated by it is still to be seen.
Moreover, recent regulator recommendation has stimulated some uncertainty in the
sector, especially

with regards to recent 2G pricing and license renewal fees. However, increasing rural
penetration and data services offers immense potential going forward.

This sector has already shown phenomenal development in revenue contribution as
also technology development. This is likely to continue for the next few years.

Big Boost for Banking Sector
The FM in his Union Budget speech said the government will provide capital support to
the tune of Rs 6,000 crore to public sector banks during the next fiscal to strengthen
their capital base.

During the year 2010-11, the government will provide a sum of Rs 20,157 crore for
infusion in public sector banks to maintain Tier I CRAR at 8% and increase the
government equity in some banks to 58%.

As part of the recapitalization exercise, the government approved infusion of Rs 6,211
crore into five banks in June 2010. Banks, which had got capital support from the
government in the first tranche, included, Union Bank of India, Bank of Maharashtra,
IDBI Bank, UCO Bank and Central Bank of India. The second tranche, announced
earlier this month, also provided capital support for several public sector banks,
including Corporation Bank, UCO Bank, Indian Overseas Bank and United Bank of
India. In addition, the finance minister also announced the recapitalization of Regional
Rural Banks (RRBs). As part of financial strengthening of regional rural banks, an
amount of Rs 350 crore was given to these banks during this year.


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Allocation for Boosting Agri Output

Aiming to control price rise in non-cereal food items, the government today announced
a budget outlay of Rs 2,200 crore to boost production of vegetables, pulses, oilseeds,
millets and fodder.

The government also decided to continue the existing two schemes -- one for Green
Revolution in eastern states with an allocation of Rs 400 crore and the other to promote
pulses' output scheme with an outlay of Rs 300 crore. In his 2011-12 Budget speech,
Finance Minister announced Rs 300 crore each for new schemes to step up production
of vegetables, oil palm, nutri-cereals, protein supplements and fodder.

The recent spurt in food prices was driven by increase in prices of items like fruits and
vegetables, milk, meat, poultry and fish, which account for more than 70% of the WPI
basket for primary food items.

KEY HIGHLIGHTS
Corporate tax surcharge reduced from 7.5% to 5%. Minimum alternate tax rate
up from 18% to 18.5%.
IT exemption for taxpayers raised from Rs 1.6 lakh to Rs 1.8 lakh. Tax relief is
about Rs 2,000 across-the-board.
Senior citizens to get higher IT deduction limit of Rs 2.5 lakh. Entitlement age
reduced to 60 from current 65
New category of senior citizens above 80 years to get higher IT deduction limit of
Rs 5 lakh from this year
Service tax levels and excise stay at 10%; Peak rate of customs duty remains
unchanged


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Excise exemptions withdrawn on 130 items; to pay minimum excise of 1% from
next year
Foreign individual investors allowed to invest directly in mutual funds subject to
KYC requirements
Govt. to allow issue of Rs 30,000 crore worth of tax-free bonds by infrastructure
companies in 2011-12
Tax deduction for investment in infrastructure bonds of Rs 20,000 extended for
one more year
Investment in fertilizer plants and machinery to be treated as infrastructure
investment
Fiscal deficit for 2010-11 seen at 5.1% against 5.5% budgeted; deficit for 2011-
12 projected at 4.6% of GDP
Government to introduce direct cash payments for those entitled to subsidies in
kerosene, cooking gas and fertilizer by March, 2012.
Government considering extension of nutrient-based subsidy for urea, the largest
chunk of fertilizers used in agriculture
National mission for electric and hybrid vehicles to be set up to create
environment-friendly automobiles
Priority sector home loans limit raised to Rs 25 lakh from Rs 20 lakh.
Interest subvention on home loans up to Rs 15 lakh. Mortgage risk guarantee
corporation to insure loans to the poor
Public sector disinvestment target for 2011-12 is raised to Rs 40,000 crore
Centre's net borrowing figure for 2011-12 fixed at Rs 3,43,000 crore; fiscal deficit
figure at Rs 4,12,000 crore
Cement excise duties will be shifted to valorem basis from specific duty now
Loss on direct tax reliefs at Rs 11,500 crore; gain on indirect tax changes at Rs
11,300 crore


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FM says no need to remove stimulus package at this stage, but will withdraw
excise exemptions.
No excise duty on equipment for UMPPs
Ship-owners allowed duty-free spare parts import
Export duty on iron ore pellets withdrawn
To replace excise with ad valorem duties for cement
20% ad valorem export duty on iron ore
Cut customs duty on yarn to 5% from 7.5%
Stainless steel scrap exempt from basic customs duty
Propose to raise service tax on air travel
Peak rate for customs duty unchanged
10% excise duty on branded garments
Basic customs duty on Pet Coke and Gypsum to be reduced to 2.5%
Base rate on excise duty raised to 5%
Export duty at 20% for iron ore
Peak rate for customs duty unchanged
Base rate on excise duty raised to 5%
Basic food, fuel exempted from central excise duty
1% excise duty on 130 new items
Reduce customs duty on micro irrigation equipment
FY12 fiscal deficit at Rs 4.12 lakh cr
FY12 net market borrow target at Rs 3.43 lakh crore


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Union Budget :- A Special Report By CapitalHeight

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