Budget in Detail (2004-05)

Two per cent education cess

The finance minister has implemented a 2 per cent education cess. Chidambaram has also announced that there will be no need for a collateral on education loans up to Rs 7.5 lakhs. This limit was Rs 4 lakhs earlier. Chidambaram said during in his budget speech that "No student admitted to any professional course will be deprived of the opportunity to study because of lack of funds." Students availing the loan have to however provide sufficient guarantees for availing this facility.

The education cess will be a surcharge on taxes which is expected to yield the government Rs 4000-5000 crores.

FDI in telecom increased to 74 per cent

It is proposed that FDI is necessary in sectors where the dependence on technology is high. It is proposed that FDI in Telecom be increased to 74% from 49%, Civil aviation to 49% from 40% and Insurance to 49% from 26%.

Major Beneficiaries (listed)

Bharti Tele, Reliance, Tata (Telecom), Max India, Kotak Mahindra, ICICI (Insurance)

Registration procedures for FIIs simplified

The government intends to simplify the registration procedure for FIIs. Raise the debt investment limit for FIIs from $1 billion to $1.75 billion. Introduce an alternative trading system for small and medium companies to raise and list capital.

The RBI and Sebi will announce necessary measures. An inter-ministerial committee recommended raising of FII limits in various sectors. The finance minister will examine this.

Cement and steel sectors to benefit

Focus on Infrastructure and Rural housing is expected to benefit the cement and steel sectors. Almost all players in these segment are expected to benefit --- the bigger beneficiaries include Gujarat Ambuja, ACC, Grasim, Cemco, TISCO and SAIL.

Disinvestment to happen selectively

The government plans to go selectively in disinvestment. P. Chidambaram has announced a policy that will set up a board for reconstruction of PSEs (BRPSE) to advise the government on measures to restructure PSEs, including advise on disinvesment or closure or sale. The government plans to divest a 5 per cent stake in NTPC. This year’s disinvestment targets will yield the government Rs 4000 crore. The finance minister will ensure that the money raised will be used for specified social sector schemes. Also, the government will seek disinvestment as long as government retains control PSE status is not affected.

No change in small saving interest rates

Small savers, especially senior citizens, have something to cheer about. The government has retained the rates on small savings schemes to 8 per cent, as was widely expected. Rates on PPF and other small savings schemes will stay at 8 per cent. But for senior citizens the government has announced a new senior citizens savings schemes offering 9 per cent. Also, interest rate on the Reserve Bank of India's Bonds has also been retained at 8 per cent. However, the Varishta Pension Bima Yojana will no longer exist.

Mandatory Cenvat duty withdrawn from handloom and powerloom sectors

The Union Budget 2004 has proposed to withdraw the mandatory Cenvat duty from the handloom and powerloom sectors. A new tax regime for textiles sector has also been proposed where no mandatory excise duty on pure cotton, wool and silk, whether it is fibre, yarn, fabric or garment. Mandatory excise duty at the rate of 16 per cent has been proposed on man-made staple fibre, 24 per cent on polyester filament yarn (including textured yarn) and 16 per cent on other man-made filament yarn (including textured yarn).

"The budget has made cotton textiles more competitive vis-à-vis the synthetic/man made fibers blended textiles by reducing the excise duties," says S.P. Oswal, chairman, National Committee on Textiles, Confederation of Indian Industry. Duty on cotton yarn, and fabrics & garments has been reduced from 8 per cent and 10 per cent respectively to 4 per cent. "This also reduces the price disadvantage that composite mills would have had vis-a-vis the powerloom players after elimination of mandatory CENVAT. The reduction in excise duty on cotton yarn, fabrics and garments would improve the competitive position of cotton garments vis-a-vis synthetic/man made garments," says Rajneesh Rastogi, head research CRIS INFAC.

Gainers: Vardhman Spinning, Mahavir Spinning, Nahar Spinning, Rajasthan Spinning.

Foreign cap in insurance raised to 49% from 26%

Finance Minister P Chidambaram announced a hike in FDI in insurance from the current 26 per cent to 49 per cent. This is in line with the recommendation of the Insurance Regulatory and Development Authority, which had supported the industry's demand for increasing the limit to help raise additional capital.

Any increase in the foreign investment limit, however, requires an amendment to the Insurance Act. "Unlike other sectors, where an increase in foreign direct investment can be effected through a notification, the 26 per cent cap in the insurance sector has been specified in the Insurance Act itself," according to a spokesperson for a private insurance company.

Till March 2003, the paid-up capital for the 27 players in the insurance sector was Rs 4,172.13 crores in the IRDA annual report. According to IRDA during the last four years, since the sector was opened companies have expended their capital and required infusion of funds to meet the capital adequacy norms stipulated by the regulator.

For instance, the market leader in the life insurance sector, ICICI Prudential has increased its capital to Rs 625 crore between December 2000 and now. Similarly, Max New York Life has 346 crore, HDFC Standard Life to Rs 218 crore and Birla Sun Life to Rs 230 crore, besides other players. The rise in the cap will enable foreign partners who want to be more aggressive in the insurance market to infuse more capital as many of the Indian partners are far too stretched to fund any capital infusion.

Defence expenditure to go up

The finance minister proposed a hike in defence expenditure from Rs 65,000 crore to Rs 77,000 crore. This will benefit defence equipment makers Bharat Electronics and Tata Power, among others.


Excise duty on steel back at 12 per cent

The excise duty, which was reduced to 8 per cent from 12 per cent in the interim budget in February, has been increased to 12 per cent. The peak customs duty now stands at 15 per cent.

The prime reason for reduction in excise duty earlier was to bring down the steel prices. However the steel prices remained firm despite the cut. The increase in excise duty is thus negative for steel players - Tata Steel, SAIL, Jindal Iron.

Excise duty on tractors exempted

Excise duty on tractors has been completed exempted. The earlier excise duty stood at 16 per cent. This is a positive indicator for the tractor industry. The major gainers are M&M and Punjab Tractors.

Excise duty on non-alloy steel up to 12%

It is proposed to hike excise duty on non-alloy Steel from 8% to 12%, while customs duty to be reduced to 10%. Negative impact on SAIL, TISCO and Jindal Iron & Steel (JISCO). However, the user industries like auto and construction are expected to benefit from lower prices.

Nothing much for the auto sector

There is no significant measure announced for Auto sector. There were expectations of reduction in excise duty on passenger cars from 24 per cent to 16 per cent, which is the case for all other automobiles. However 150 per cent deduction allowed for R&D expenses incurred by auto manufacturers is a positive. This is positive for players like Tata Motors and M&M, who are working on development of new products on different platforms. Hence overall the budget proposal is somewhat neutral for the sector. However overall focus on the rural and agriculture sector is positive for the 2-wheeler industry (Hero Honda and Bajaj Auto to benefit) and the tractor industry

Transaction tax. Pay 0.15 per cent now

Buy stocks and pay an additional 0.15 per cent to the existing brokerage of about 0.5 per cent and 0.004 per cent transaction fee charged by stock exchanges to brokers (which many pass on to investors). Plus there is the eight per cent service tax on brokerage fee that you pay currently. Thus, if your purchase value is Rs 10,000 you will now pay Rs 50 towards brokerage, Rs 0.40 towards exchange fee, Rs 4 towards service tax (eight per cent on Rs 50) and Rs 15 towards the new transaction tax. Thus, you would pay a total of Rs 69.40 now while earlier you would have paid Rs 54.40.

But when you sell shares you would be exempt from the transaction tax. So the shares you are already invested in will not bear you more costs if you decide to sell. But all fresh investments you make would entail the new 0.15 per cent transaction tax on purchases.

This new change comes because the finance minister has done away with long term capital gains tax altogether while the short term capital gains tax will be limited to 10 per cent.

FDI hikes welcome

The budget abolishes long-term capital gains tax and has reduced the tax rate on short-term capital gain tax to 10 per cent. However, the introduction of turnover tax of 0.15 per cent on the value of security is a negative for the individual investor.

However FDI continues to encouraged especially in sectors like Telecom, high technology and exports. The FDI limit also has been hiked in Telecom to 74 per cent from 49 per cent. This is positive for Bharti Tele.

Similarly FDI limit in Civil Aviation hiked to 49 per cent from 40 per cent. On Insurance the FDI limit now stands at 49 per cent from earlier 26 per cent.