No damage is good news for India Inc

CORPORATE SECTOR: But many are disappointed over lack of big-ticket reforms

But many are disappointed over lack of big-ticket reforms

The key takeaway for India Inc from the finance minister’s Budget speech was not what was in it, but what wasn’t. The general pre-Budget worry of an excise duty increase for auto and cigarettes companies turned out to be misplaced. No wonder, the biggest stars among the market movers on Monday included ITC, closing the day up over a record 8.2 per cent; and Mahindra & Mahindra and Maruti Suzuki — both rose by over 3 per cent each.

As Ashok Leyland Managing Director R Seshasayee puts it: “The Budget has not given the shocks that the industry was fearing.” Marico’s boss Harsh Mariwala is more specific. “The fears of an excise duty hike have been put to rest,” he said.

 

With no tax hikes, even the usually silent ITC management came out with Budget reactions. “The measures to expand the tax base would also provide a more robust source of future revenue accretion and competitiveness of the Indian economy,” said company’s Chairman Y C Deveshwar.

But sectoral reactions aside, the overall response from companies was muted. There were no big-ticket announcements, neither has any reforms architecture been put in place for FDI in insurance or retail. There would be no material changes in laws and that’s the significant takeaway, that was the reaction from most of the CEOs even though they cheered the fact that the overall costs would not go up as excise duty had not been raised. However, the service tax coverage has been expanded.

Their final verdict: A simple, ploughman’s Budget.

Even from the consumers’ point of view, there was nothing in the Budget was the refrain. Future Group CEO Kishore Biyani said the Budget had nothing much to offer as the relief of Rs 20,000 in direct tax would, in no way, affect his consumption or spending power. “One major segment of the urban poor which accounts for 20 per cent of India has been neglected.”

Therefore, even as the stock market eventually drifted along by shedding nearly all the gains it saw in the three per cent morning rally, it ended the day flat at 17,823 points.

The roadmap for the goods and services tax (GST) and Direct Taxes Code (DTC) had already put the tax framework in place and have more or less set the agenda for the FM. In the backdrop of those, the FM had limited maneuverability when it came to his tax proposals. Therefore, all the key tax rates — excise, Customs and service — remain untouched. In tandem with his move to gradually phase out surcharges, the current corporate surcharge has been brought down to five per cent from the current 7.5 per cent. But, at the same time, the Minimum Alternate Tax (MAT) rates have been increased by 50 basis points to 18.5 per cent. The reduction in surcharge, according to tax consultants BMR Advisors, would translate to effective tax rates for companies going down by 0.77 per cent.

The central excise duties at 10 per cent have been left untouched, as the FM wanted “to see improved business margins translated into higher investment rates”. Even though the GST rollout date was not mentioned, the FM has begun rationalising the number of exemptions under central excise by withdrawing all relief on 130 consumer goods items immediately. Coming under the tax net, these 130 items will now also attract a one per cent excise duty.

Y M Deosthalee, chief financial officer of infrastructure firm L&T, said continuation of fiscal stimulus and reduction of surcharge on corporate tax to five per cent were welcome steps.

The biggest blow came prematurely for developers of special economic zones and units operating in them as the Budget have imposed an 18.5 per cent MAT on them. It was suggested in DTC and was expected in April 2012, but there was significant opposition to the move from corporate entities and developers. “But now, it’s been a double whammy of sorts. First, it’s been brought forward by one year and, second, it’s unlikely now that it will be removed,” said Bobby Parikh, Managing Partner BMR & Associates.

Infrastructure financing saw a handful of initiatives with efforts to further deepen the corporate bond market but concerns over implementation continued with no mention of land acquisition and other supply-side constraints.

“The FM has assured that growth will continue but he could have focused more on infrastructure,” said CII President Hari Bhartia.