Every year government intervenes in the economy by rewriting the basic rules of investments, commerce and trade through budget. The corporate sector waits
for it on Feb.28 each year, in the anticipation of positive news from FM. These budget expectations are hyped by media and its impact is seen in the stock exchanges both during ore and post budget rally. Markets move up in the
expectation of favorable changes and falls as soon as any negative news comes. Though this had been a trend for long but this year we have seen no pre and post budget rally. Reasons for it vary from people to people; some say due
to geographical tensions low FII's investments, less speculative activity or due to Indo - Pak Cricket Match. While last year inspite of Indo - Pak tensions and Ayodhya issue market witnessed a pre budget rally, or even in 1999
when Jayalalitha gave BJP sleepless nights. This time the budget has been good, it is aiming at several reforms like poverty eradication, fiscal consolidation through tax reforms , infrastructure development, enhancing
manufacturing sector efficiency. Let us analyse, what it has brought for the corporate sector:
1. Reduction in small saving may push general interest rates further down resulting in low cost Financing in near future. If Banks do not reduce the Interest rates, companies may
borrow from Foreign Markets.
2. Abolition of dividend tax & LTCG on shares will bring common investor to stock market resulting in revival of primary & secondary market.
3. Rationalization of Indirect tax and
implementation of VAT, in general, will reduce tax liability resulting in more profits.
4. The surcharge on corporate tax has been reduced from 5% to 2.5% resulting in a saving of over Rs. 300 crores for the corporate sector.
5. SSI reservation will be withdrawn from 75 items of laboratory chemicals and reagents, leather and leather products, plastic products, chemicals and chemicals products and paper products. SSIs in the Corporate Sector
manufacturing these products shall face increased competition whereas large corporate planning to enter these sectors shall be benefited.
6. Overseas investment under the automatic route will be permitted to corporate with a
proven track record, even where the investment is not in the same core activity. Limit on such investment will be raised from 50% of the net worth of the Indian company to 100%.
7. The improvement in the physical
infrastructure shall improve overall corporate efficiency and thereby boost economic/corporate growth. Lack of proper infrastructure had been a major constraint in faster economic development. The investment in physical
infrastructure involving an outlay of Rs. 40,000 crore on road development; Rs. 8,000 crore on National Rail Vikas Yojana; renovation of two airports and two seaports at involving an expenditure of Rs. 11,000 crore; and
establishing two global standard international convention centers at an estimated cost of Rs. 1,000 crores are likely to benefit a large number of corporates engaged in construction activities and those manufacturing steel, cement
etc. Besides there will be a large-scale generation of employment.
1. 12.5% tax on dividend distribution will result in huge cash out flow. Some companies may declare lesser dividend.
2. Amendment of Section 36(1)(iii) of the Income Tax Act,
1961, providing for disallowance of interest on borrowed capital during the pre-commissioning stage. Hitherto interest on borrowed capital during the pre-commissioning stage of a project used to be allowed as revenue expenditure.
Now this requires to be capitalized resulting in higher tax outflow. The move would impact companies which are venturing into new projects or undertaking capacity expansions, at least in the near term, since they will not be
entitled to claim tax deductions on the interest paid on borrowed capital in the pre-operative stage. However, this impact will be offset over a period of time because of availability of the benefit of increased depreciation.
3. Increase in prices of petrol & diesel will increase the cost of production. In a recessing phase it will be difficult to plan it to customers resulting in squeezed margins.
4. Increase in service tax from 5%
to 8% shall affect the performance of Corporates in the services sectors like telephones, banking, insurance, call centers etc
If we analyse the proposals for different sectors than Textile, Information Technology, Tourism, FMCG (A.C., Cars), Banking & Steel seem to
benefit more from changes in direct & indirect taxation, or other policy changes. Overall the Finance Minister has attempted a sincere move given the election time and global political turmoil. Corporates should keep in
mind that in future, government will hive off various protection schemes and budget too will loose its shine and therefore they shall be required to become globally competitive by exploring various opportunities provided by the
opening up of economy.
1. Budget Speech, The Economic Times, Feb.28, 2003.
2. Economic Survey, The Economic Times, March 1, 2003.