Budget Highlights

Economy Assessment:
Growth:
Getting back to potential growth rate of 8% is the challenge facing the country. Slowdown in Indian economy has to be seen in the context of slowing global economic growth from 3.9% in 2011 to 3.2% in 2012. However, no reason for gloom or pessimism. Of the large countries of the world only China and Indonesia growing faster than India in 2012-13. In 2013-14, only China projected to grow faster than India.

February 2013
Taxes:
Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution and independent judiciary for greater assurance was underlying theme of tax proposals Target to achieve 11.9% of tax GDP ratio

Direct Taxes - Individual & Corporate:

No change in Slab Rates for personal income tax. o o o o No tax up to Rs. 2 lakh; 10% tax on 2 lakh to 5 lakh; 20% on 5 lakh - 10 lakh; 30% on 10 lakh and above

Inflation:
Headline WPI inflation to 7% and core inflation to 4.2%. Food inflation is worrying but all possible steps to be taken to augment the supply.

Fiscal & Current Account Deficit:

Fiscal deficit will be 5.2% in current year and 4.8% in the next fiscal. Revenue deficit for the current year at 3.9% and for the year 2013-14 at 3.3%. FM pledged to reduce fiscal deficit to 3% by 2016-17 and revenue deficit to 1.5% of GDP. In 2011-12, tax-GDP ratio was 5.5 per cent for direct taxes and 4.6 per cent for indirect taxes. Foreign investment in an imperative in view of the high current account deficit (CAD). FII, FDI and ECB three main source of CAD Financing. Foreign

Tax credit of Rs 2000 to be provided to every person to having income of up to Rs 5 lakh, this will benefit 1.8 crores people. Surcharge of 10 per cent for individuals whose taxable income is over Rs 1 crores. Increase surcharge from 5 to 10% on domestic companies whose taxable income exceed 10 crores. In case of foreign companies who pay a higher rate of corporate tax, surcharge to increase from 2 to 5 %, if the taxable income exceeds 10 crores. In all other cases such as dividend distribution tax or tax on distributed income, current surcharge increased from 5 to 10 %. Additional surcharges to be in force for only one year. Education cess to continue at 3 per cent. wer sector to avail benefit under Section 80-IA extended from 31.3.2013 to 31.3.2014 Concessional rate of tax of 15 percent on dividend received by an Indian company from its foreign subsidiary proposed to continue for one more year. Parity in taxation between IDF-Mutual Fund and IDFNBFC.

Plan & Budgetary Allocations

Revised Estimates (RE) of the expenditure in 201213 at 96 per cent of the Budget Estimates (BE) due to slowdown and austerity measures. During 2013-14, BE of total expenditure of 16, 65,297 crores and of Plan Expenditure at 5, 55,322 crores. Plan Expenditure in 2013-14 to grow at 29.4% over Revised Estimates for the current year.

A Category I AIF set up as Venture capital fund allowed pass through status under Income-tax Act. TDS at the rate of 1 % on the value of the transfer of immovable properties where consideration exceeds 50 lakhs. Agricultural land to be exempted. A final withholding tax at the rate of 20 % on profits distributed by unlisted companies to shareholders through buyback of shares. Proposal to increase the rate of tax on payments by way of royalty and fees for technical services to nonresidents from 10 percent to 25 %.

Impact on Retail Investor:

Securities Transaction Tax (STT) reduced on equity future, mutual fund. Rajiv Gandhi Equity Scheme will be liberalized to allow first time investor to invest in Mutual Fund and equity (income threshold increased from 10 lakhs to 12 lakhs). Rajiv Gandhi Equity Saving Scheme to allow for income tax deduction of 50 % to new retail investors, who invest upto Rs. 50,000 directly in equities and whose annual income is below Rs 10 lakh to be introduced. The scheme will have a lock-in period of 3 years. First housing loan up to Rs 25 lakh would get additional deduction of interest of up to Rs 1 lakh in 2013-14. Tax free bonds issue to be allowed up to Rs 50,000 crores in 2013-14 strictly on capacity to raise funds from the market. Contributions made to central and state government health scheme eligible to tax benefit. Eligibility conditions for life insurance policies of persons suffering disabilities to be liberalized TDS of one per cent on value of properties above Rs 50 lakh. Agriculture land exempted.

Indirect Taxes
No change in basic customs duty rate of ten per cent and service tax rate of 12 %. No change in peak rate of customs duty for nonagriculture products. Import duty raised from 75 to 100 % on luxury vehicles. Import duty raised on set-top boxes from 5 to 10 %. Duty free limit on gold raised to Rs 50,000 in case of male and Rs 100,000 in case of female. Specific excise duty on cigarettes and cigars raised by 18 per cent. Excise duty on SUVs to be increased to 30 per cent from 27 per cent, SUVs registered as taxis exempted Duty on mobiles above Rs 2,000 raised from 1 to 6%, based on their maximum retail prices. Service tax to be levied on all a/c restaurants One time voluntary compliance scheme for service tax defaulters to be introduced. Interest and penalties to be waived. Out of nearly 17 lakh registered assesses under Service Tax only 7 lakhs file returns regularly. A Compliance Encouragement Scheme proposed to be introduced. Defaulter may avail of the scheme on condition that he files truthful declaration of Service Tax dues since 1st October 2007. Direct Taxes Code (DTC) bill to be introduced in current Parliament session. A sum of 9,000 crores towards the first installment of the balance of CST compensation provided in the budget. Work on draft GST Constitutional amendment bill and GST law expected to be taken forward.

Capital Markets Reforms:

Investor with stake of 10 % or less will be treated as FII; any stake more than 10 % will be treated as FDI. FIIs will be allowed to participate in exchange traded currency derivatives FIIs will also be permitted to use their investment in corporate bonds and Government securities as collateral to meet their margin requirements. SEBI to prescribed requirement for angel investor pools by which they can be recognized as Category I AIF venture capital funds. Modified GAAR norms to be introduced from April 1, 2016. Small and medium enterprises, to be permitted to list on the SME exchange without being required to make an initial public offer (IPO). Stock exchanges to be allowed to introduce a dedicated debt segment on the exchange. Commodities transaction tax levied on nonagriculture commodities futures contracts at 0.01 per cent

Industry & Sectors:

Need of new and innovative instruments to mobilize funds for investment in infrastructure sector. Measures such as: o Infrastructure Debt Funds (IDF) to be encouraged, o Infrastructure tax-free bond of 50,000 crores in 2013-14. o Raising corpus of Rural Infrastructure Development Fund (RIDF) to 20,000 crores o 5,000 crores to NABARD to finance construction for warehousing. o 3000 kms of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh will be awarded in the first six months of 201314. o Two new major ports to be set up in West Bengal and Andhra Pradesh Oil and gas exploration policy will be reviewed and moved from profit sharing to revenue sharing. Policy on exploration of shale gas on the anvil; natural gas pricing policy will be reviewed and uncertainty removed. Guidelines regarding financial restructuring of DISCOMS have been announced. Govt to set up India's first women's bank as a public sector bank by October. Compliance of public sector banks with Basel III regulations to be ensured. 14,000 crores provided in BE 2013-14 for infusing capital. PSU banks to have ATMs at all their branches by March 31, 2014. Insurance companies will be empowered to open branches in Tier-II cities with approval of IRDA.

However the market was disappointed that the Budget throw out specific steps to spur growth into the economy. The increase in surcharge may impact the Sensex earnings by 1-1.5%. We feel going forward investors will now focus on earnings growth and global news flow. Government bonds fell to their lowest in more than two weeks after the finance ministry announced a gross market borrowing target that was well above expectations. The government is planning to borrow 6.29 trillion rupees in the fiscal year starting April, higher than the 5.6-5.7 trillion rupees for the current fiscal year. Overall, the government has budgeted a fall in the subsidy burden from 2.6% of GDP in FY13 to 2% of GDP in FY14. The government expects gross market borrowing of INR 6.3 trillion and net borrowing of INR 4.8 trillion with around INR 0.5 trillion crores of bond buybacks.

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Fund House View:

We believe the Budget is a Balanced and Prudent Budget which is taking the economy on path of Fiscal Consolidation. Facing the ire of rating agencies and investors alike, the finance minister delivered his promise of fiscal consolidation, projecting a fiscal deficit at 4.8% of GDP for FY14, in line with consensus expectations. The revised estimate of the FY13 fiscal deficit is 5.2% of GDP, better than the revised budget target of 5.3% of GDP.

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