Interim budget

थे interim budget presented for FY10 in which the government left the tax rates unchanged and added to this Government also announced cut in both excise duty and service tax by 2% pts in a bid to stimulate domestic demand. Though the immediate impact on some of the key sectors is likely to be minimal but Government may incur estimated revenue loss of Rs. 300 bn for FY10.

Real Estate

The impact of the cut in service tax on rentals paid by tenants in commercial properties is insignificant in our view. The extent of the cut will not materially improve affordability of commercial property. Service tax is a pass-through item for real estate developers; hence the cut will not benefit them.

IT Services

The ambiguity over computation of export profits at SEZ has been clarified. Till date, only the proportionate profits (SEZ revenues/overall revenues) of the SEZ entity were tax free. It has been now clarified that 100% of SEZ profits are tax free. This would not have any major implications for Indian IT services sector. With a flat revenue growth over the next year, contribution from SEZs is very low at Indian IT services vendors. If the STPI tax benefits are not extended further, sector leaders run the risk of sharply rising tax rates from the current 15% to higher level in 2011.

Auto

As per the current duty structure only commercial vehicles (excluding buses) and three-wheelers fall in the 10% excise bracket (Small cars suffer 8% duty and bigger cars 20%; Tractors suffer no excise duty) and would thus benefit from the 2%pt reduction in excise duty. We expect most of the 2% cut to be passed along.

Cement

Excise duty on bulk cement is reduced from 10% or Rs 290 whichever is higher to 8% or Rs 230 whichever is higher. Bulk cement forms 10% of the total dispatches of the industry. The benefit to consumers from duty reduction of 2%, on average cement price of Rs 200 per bag works out to Rs 4 per bag. We believe that companies are unlikely to pass the benefit entirely with strong seasonal demand.

Consumer

Excise duty on certain consumer goods items such as soaps and detergents has been reduced from 10% to 8%.Companies with majority of production outside excise free zones would benefit. The benefit is likely to be passed on to consumers in the form of price cuts to spur demand in categories like soaps and detergents which have witnessed stagnating volumes.

Telecom

Telecom companies will enjoy a double benefit – not only will service tax reduction increase affordability (though in addition to price cuts that are already happening through competitive pressure), but also, their cost of procurement of equipment will fall through a reduction in excise duty / CVD(particularly passive infrastructure as also some elements of active infrastructure) while services will become cheaper, especially important as telecom companies are continually increasing outsourcing. Total reduction in cost may be more than 2.2%m, though we suspect only the consumer pricing end of it (since not all elements of ARPU will fall, etc. termination charges will not fall, only subscriber revenues will fall, hence the cost reduction will be ~1.6%) will be passed on. The remaining 0.6% will likely be kept by the telcos, marginally improving profitability.