India, Inc finds no key to ignition

The CEOs of India Inc are defending the budget on TV, but off it, the mood is solemn in corner offices. It’s hardly been a dream budget for India Inc, instead somewhat of a mishmash. Individual sectors such as telecom, aviation and insurance have got their long awaited — and much lobbied for — hikes in FDI limits. That’s where the good news ends and the mess — oops, cess — begins.

That’s where the good news ends and the mess — oops, cess — begins. The imposition of the 2% education cess will mean higher payouts by way of corporate taxes, as well as higher excise duty on products they sell and more customs duty on inputs they import. There is widespread disappointment that the corporate tax wasn’t cut and that the dividend distribution tax remains firmly in place. The peak corporate tax has gone up to 36.6%(including the cess), while the dividend distribution is higher at 13.07%.

The announcement that the FDI caps for telecom, civil aviation and insurance would go up has been widely welcomed, although implementation remains an issue. The hike in the FDI cap for telecom to 74% from 49% has been prom-ised before, but implemen-tation has been repeatedly stalled.

The FDI hike in the insurance sector to 49% from 26% would require an amendment to the IRDA bill, a move that is bound to be opposed by the Left. The announcement on the FDI hike for the aviation sector does not say whether foreign airlines can invest in local firms or whether FDI would have to come from private equity investors.

This government is avowedly pro-investment and towards that end the additional depreciation allow-ance of 15% will now be available to companies ex-panding capacity by just 10%, instead of 25% as earlier. Indeed, the budget is strewn with sops of one kind or the other.

Automobile companies in-clined to invest in R&D can deduct up to 150% of ex-penditure. Building hospitals in rural areas would also entitle the company concerned to tax benefits. Telecom and power com-panies find their tax holidays left in place. Not surprisingly, given this gov-ernment’s rural moorings, there is 100% tax deduction for agri-processing industries for five years.

Excise duty exemptions for factories located in the North-East and J&K remain in place, while similar excise sops for factories in Uttaranchal and Himachal Pradesh will be in place till ’07. The Kelkar committee report, which had boldly proposed scrapping exemptions, is missing in action. These exemptions ensure that the effective tax rate is lower than the peak rate of 36.6%, which would help mitigate the impact of the cess.

For good measure, there is an investment commission and a national manufactur-ing competitiveness council thrown in. No-one seems to Know quite what these will do.

The steel industry seems to have been punished for cashing in on the commodity boom by raising prices earlier in the year. Excise duty has gone up to 12% from 8%, while customs duty has fallen to 10% from 15%. Makers of other basic metals such as lead and zinc face lower customs duties of 15%, as compared to 20% earlier.

Corporate treasuries will have to work harder, since the withholding tax on units of debt mutual funds held by corporates has been in-creased to 20%. Corporates had been massive investors in debt mutual funds in ’03-04.

Despite these minor irri-tants, India Inc will be happy that the FM intends to maintain a “benign inter-est rate regime�, pressure from the Left notwithstand-ing. Data drawn from 2,690 companies indicates that their net profit increased 32% to Rs 79,717 crore. The movement to VAT will help industry since all input taxes will become reimburs-able.