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Union Budget 2011-12 01 Marc h 2011

UNION BUDGET 2011-12


In budget FY12, the Finance Minister has chosen to stay the course of fiscal prudence and try to make the economy even more
resilient from a long-term perspective. A disinvestment target of Rs 40,000 crore for 2011-12, bank licenses to new private sector
players and speeding up of various pending financial sector bills were some of the highlights of the Budget. The FY12 union
budget has many positives indeed—FY12 fiscal deficit at 4.6%, Gross market borrowing for 2011-12 seen at Rs 4.17 lakh crore ,
lower-than-expected net government borrowing at Rs 3.43 lakh crore, foreign investment into MFs, push for supply reforms in the
agriculture/storage sector, hike in ceiling for FII investment in corporate debt to US$ 40bn—very positive for capital flows
indeed—talks of retail FDI, and clearing of reform legislation (DTC/GST, public debt, among many others).

Banks (capital infusion, lower borrowing targets), and Consumption (no excise roll-back a positive for Autos, FMCG) are the big
beneficiaries, while it could ve been better for Mining (export duties) and IT Services (no STPI extension, implied INR
appreciation on FDI/FII flows). Infrastructure ought to get a boost with easier funding. Cash transfers to OMCs are welcome, but
one would have liked a roadmap on pricing reform, since the subsidy allocation and the consequent final impact on OMCs
remain unrealistic.

Here is a Sector-wise rundown on the way the budget will affect it:

Automobiles: Currently the automobile industry is amidst high inflation, rising raw material prices which has to some extent
being passed on as series of vehicle price hikes; increase in interest rates and fuel prices. In this scenario, nil change in the
existing excise duty on all vehicles is welcome change for the automobile industry as a whole as well as the end consumers.

Textiles: The budget has left mixed bag of colors for the textile industry. While the TUFS allocation was given, duty draw back
benefits for exports are not encouraged. It has left an impression to give helping hand for the sectors which were still in the
nascent recovery stage after the global melt down. Excise duty cut on Nylon and textile machinery are some good examples.
While the yarn industry has some cheers with some of their recommendations granted, garment industry has been negatively
impacted.

Infrastructure: By addressing key issues of the infrastructure sector such as cheap and long tenure funding as well as efforts to
accelerate project execution augurs well for the industry, which was plagued by project delays on account of policy confusion
(i.e. NHAI) and environmental issues. The commitment of announcing a national PPP Policy as well as setting of GoM to go into
the issues that act as bottleneck for speedy infrastructure development is a welcome move.

Pharmaceuticals: On a relative basis, the marginal increase in excise duty on formulations from 4% to 5% will impact MNC
pharma companies more than the domestic frontline pharma companies, as the share of domestic sale in the total sale of the
former are significantly higher.

Cement: The Union Budget 2011-12 has made radical changes in the excise duty calculation for cement. Now, the government
has moved to ad valorem rates, which means the higher excise duty will be on lower ex-factory prices.

Education: India will have the highest number of illiterate adults and a large percentage of unemployable literate people.
Educating a large population is on the priority list of FM's budget. The government is focused on improving the literacy rate and
the quality of education in the country. As such, the FM has increased allocation for education by 24% to Rs 52000 crore, which
goes well for education sector.
UNION BUDGET 2011-2012

Budget 2011-12: What it means for You

Personal Taxation

While the intent has been to move towards the DTC structure which is effective 2012; from a structural sense not much has
changed in the income tax slabs, the basic tax exemption limit for men is up to Rs 1.8 lakhs (up by Rs 20000 but less than the
expected limit of Rs 2 lakhs). The limit for women remains unchanged at Rs 1.9 lakhs.

Infrastructure sector continues to get the boost

For the retail investor, tax exemption upto Rs 20,000 investment in Infrastructure bonds continues for one more year. This
apart, budget outlay has been meaningfully increased from last year and this bodes well for infrastructure mutual fund
schemes that the retail investor has exposure to.

Service Tax

The effort to introduce GST with the agenda to pass an amendment in the constitution this year to put into effect the Goods
and services tax is a good step towards aligning the taxation structure pan – country. This has also brought in additional
services under the tax net. The rate of service tax is retained at 10%+ cess. A nominal 1% central excise duty has also being
imposed on 130 items, many of them consumer goods that were earlier exempt from certain indirect taxes.

FIIs can invest through MF


route

The budget allows foreigners to invest in Indian equity oriented mutual funds if they fulfill the SEBI KYC norms. Till now they
could invest only in foreign funds which had India in their emerging markets theme. This will provide a boost to the MF
industry and will go a long way for a deeper asset markets.

Agricultural
sector

Overall thrust to the agricultural sector is positive for the common man as it would provide relief from higher agri-
commodity prices that have been ruling for the past 6-12 months. Initiatives to set up cold-storage chains, warehouses etc.
will go a long way to eliminate the supply chain bottlenecks of present day.

Thrust on
housing

By providing higher interest rate subvention to ticket sizes of Rs 25 lacs (increased from Rs 20 lacs) will provide for higher
credit availability from Banks / institutions and is positive for the real estate sector and aspiring home owners.

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Budget Highlights

Gross Tax receipts are estimated at Rs 9, 32,440 crore.

Non-tax revenue receipts estimated at Rs 1, 25,435 crore.

Total expenditure proposed at Rs 12, 57,729 crore.

Increase of 18.3% in total Plan allocation.

Increase of 10.9% in the Non-plan expenditure.

XI Plan expenditure more than 100% in nominal terms than envisaged for the Plan period.

Increase of 23% in Plan and Non-plan transfer to States and UTs.

Fiscal Deficit brought down from 5.5% to 5.1%.

Fiscal Deficit kept at 4.6% of GDP for 2011-12.

Fiscal Deficit to be progressively reduced to 3.5% by 2013-14.

“Effective Revenue Deficit estimated at 2.3% of GDP in the Revised Estimates for 2010-11 and 1.8% for 2011-12.

All subsidy related liabilities brought into fiscal accounting.

Net market borrowing of the Government through dated securities in 2011-12 would be Rs 3.43 lakh crore.

Central Government debt estimated at 44.2% of GDP for 2011-12 as against 52.5% recommended by the 13 th
Finance Commission.

Tax Proposals

Direct Taxes

Exemption limit for the general category of individual taxpayers enhanced from Rs 1,60,000 to Rs 1,80,000 giving
uniform tax relief of Rs 2,000.

Exemption limit enhanced and qualifying age reduced for senior citizens.

Higher exemption limit for Very Senior Citizens, who are 80 years or above.

Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%.

Rate of Minimum Alternative Tax proposed to be increased from 18% to 18.5%.

Tax incentives extended to attract foreign funds for financing of infrastructure.

Additional deduction of Rs 20,000 for investment in long-term infrastructure bonds proposed to be extended for one
more year.

Lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary.

Benefit of investment linked deduction extended to businesses engaged in the production of fertilizers.

Investment linked deduction to businesses developing affordable housing.

Weighted deduction on payments made to National Laboratories, Universities and Institutes of Technology to be
enhanced to 200%.

System of collection of information from foreign tax jurisdictions to be strengthened.

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UNION BUDGET 2011-2012

Indirect Taxes

To stay on course for transition to GST.

Central Excise Duty to be maintained at standard rate of 10%.

Reduction in number of exemptions in Central Excise rate structure.

Nominal Central Excise Duty of 1% imposed on 130 items entering in the tax net.

Lower rate of Central Excise Duty enhanced from 4% to 5%.

Optional levy on branded garments or made up proposed to be converted into a mandatory levy at unified rate of 10%.

Peak rate of Custom Duty held at its current level.

Agriculture and Related Sectors

Scope of exemptions from Excise Duty enlarged to include equipments needed for storage and warehouse facilities on
agricultural produce.

Basic Custom Duty reduced for specified agricultural machinery from 5% to 2.5%.

Basic Custom Duty reduced on micro-irrigation equipment from 7.5% to 5%.

De-oiled rice bran cake to be fully exempted from basic Custom Duty. Export Duty of 10 per cent to be levied on its
export.

Manufacturing Sector

Rate of Export Duty for all types of iron ore enhanced and unified at 20% ad valorem. Full exemption from Export Duty
to iron ore pellets.

Basic Custom Duty reduced for various items to encourage domestic value addition vis-à-vis imports, to remove duty
inversion and anomalies and to provide a level playing field to the domestic industry.

Basic Custom Duty on two critical raw materials of cement industry viz. petcoke and gypsum is proposed to be reduced
to 2.5%.

Cash dispensers fully exempt from basic Customs Duty.

Environment

Full exemption from basic Customs Duty and a concessional rate of Central Excise Duty extended to batteries imported
by manufacturers of electrical vehicles.

Concessional Excise Duty of 10% to vehicles based on Fuel cell technology.

Exemption granted from basic custom duty and special CVD to critical parts/assemblies needed for Hybrid vehicles.

Reduction in Excise Duty on kits used for conversion of fossil fuel vehicles into Hybrid vehicles.

Excise Duty on LEDs reduced to 5 per cent and special CVD being fully exempted.

Basic Customs Duty on solar lantern reduced from 10% to 5%.

Full exemption from basic Customs Duty to Crude Palm Stearin used in manufacture of laundry soap.

Full exemption from basic Excise Duty granted to enzyme based preparation for pre-tanning.

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UNION BUDGET 2011-2012

Infrastructure

Parallel Excise Duty exemption for domestic suppliers producing capital goods needed for expansion of existing mega or
ultra mega power projects.

Full exemption from basic Customs Duty to bio-asphalt and specified machinery for application in the construction of
national highways.

Other Proposals

Scope of exemptions from basic Customs Duty for work of art and antiquities extended to apply for exhibition or display
in private art galleries open to the general public.

Exemption from Import Duty for spares and capital goods required for ship repair units extended to import by ship
owners.

Concessional basic Custom Duty of 5 per cent and CVD of 5 per cent available to newspaper establishments for high
speed printing presses extended to mailroom equipment.

Jumbo rolls of cinematographic film fully exempted from CVD by providing full exemption from Excise Duty.

Out right concession to factory-built ambulances from Excise Duty.

Relief measures proposed for raw pistachio, bamboo for agarbatti, lactose for the manufacture of homoeopathic
medicines, sanitary napkins, baby and adult diapers.

Proposals relating to Customs and Central Excise estimated to result in a net revenue gain of 7,300 crore.

Servic e Tax

Standard rate of Service Tax retained at 10%, while seeking a closer fit between present regime and its GST successor.

Hotel accommodation in excess of 1,000 per day and service provided by air conditioned restaurants that have license to
serve liquor added as new services for levying Service Tax.

Tax on all services provided by hospitals with 25 or more beds with facility of central air conditioning.

Service Tax on air travel both domestic and international raised.

Services provided by life insurance companies in the area of investment and some more legal services proposed to be
brought into tax net.

All individual and sole proprietor tax payers with a turn over upto 60 lakh freed from the formalities of audit.

To encourage voluntary compliance the penal provision for Service Tax are being rationalised. Similar changes being
carried out in Central Excise and Custom laws.

Proposals relating to Service Tax estimated to result in net revenue gain of Rs 4,000 crore.

Proposals relating to Direct Taxes estimated to result in a revenue loss of Rs 11,500 crore and those related to Indirect
Taxes estimated to result in net revenue gain of Rs 11,300 crore.
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Abbreviations:

MF: Mu tu al Fu n d s
FI I : F o re ig n In s ti tu ti on a l In v es to rs
FD I : Fo r ei gn Di r ect I nv es tm e nt
DT C : Di re ct T a x Co d e
GS T : Go o d s an d Se rv i ces T a x
OM C: Oi l Ma rke ti ng C o mp a n ie s
T UFS : T e ch n o l og y U p gr ad a tio n F u nd S ch e m e
NH AI : N at io n al H ig h wa y A u th o ri ty o f I n d ia
P PP P o l ic y: P ub l i c P r iv ate P art ne rs h i p Po l i cy
GO M: G ro u p o f Mi ni s ter s
KY C: Kn o w y o ur cu s to m ers
CV D: C o u n ter va il i n g Du ty

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