Budget Countdown

 BUDGET LIKELY TO DOUBLE IMPORT DUTY ON STEEL TO 10 PC

Steel makers' persistent demand for increasing import duty on the alloy is likely to be partially met in the budget to be presented by the Finance Minister Pranab Mukherjee on Monday. "Increase in import duty on steel from five per cent now to 10 per cent might happen this time," JSW Group's Vice Chairman and Managing Director Sajjan Jindal said here. Jindal, also the President of Assocham, however, said that domestic steel makers were likely to maintain status quo as far as the price of the alloy is concerned even after the hike in import duty since price was linked with the global markets. "The hike in import duty is required to safeguard the domestic industry from dumping of the alloy into the country," Jindal said. Concerned over dumping of steel into the domestic market, where demand has been on the growth path, steel makers had appealed to the Ministry to increase import duty from five per cent now to 15-20 per cent or impose about 25 per cent safeguard duty. The demand for steel in India is likely to go up further in the current fiscal backed by a healthy demand from long steel products used in construction, the activity of which is set to pick up due to low interest rates and fall in property prices. Steel prices, however, according to economic watchdog Centre for Monitoring Indian Economy (CMIE), would remain weak due to the subdued global economic environment. Jindal also said that the Budget might levy tax on exports of raw materials used in the steel industry, mainly iron ore and coal, and incentivise value-added exports. "The indsutry should also be included in the infrastructure sector which will help it to get long-term funds as the industry is a capital-intensive one and has long gestation period," Jindal said.

 WILL TAXES GO UP, DOWN OR STAY STEADY?

The dominant context of the forthcoming 2009-10 Budget is the overwhelming need not to choke off the nascent economic revival now seemingly underway. This could mean virtually no new taxes, and perhaps even a lowering of some of the rates. The key objective is Paretian, that is, if everyone can’t be left feeling better, no one should be left feeling worse, at least. The main casualty of this approach will be the fiscal deficit, about which no one cares very much any more anyway. The FRBM (fiscal responsibility & budget management), for the foreseeable future, is history. Thus, on the corporation tax side, it is more than likely that the de jure tax incidence of 42 per cent will be reduced. How this will be done — elimination of surcharge or FBT (fringe benefit tax) or both — remains to be seen, and is probably not very important. Likewise, on the personal income-tax front, there is an economic need to boost middle class spending, a political need to match, fully or partially, the BJP’s promise of raising the tax threshold to Rs 3 lakh. There is also pressure on the banks, which are flush with funds, to not just reduce lending rates but also lend more to infrastructure projects. But they want the interest they receive from loans to infrastructure to be exempt from income-tax. This seems likely. The Prime Minister is also said to be keen that the Budget send out a reformist message. This means using the price mechanism, instead of taxation, as the main instrument of resource allocation in the economy. In practical terms, however, this means reducing subsidies. The increase in petrol and diesel prices was a feeler. There has been virtually no opposition. It also means serious disinvestment. Sectorally, the PMO wants to offer something to the US and Israel that also benefits India. The Economic Survey has already indicated that some defence industries may be opened up for FDI. Many infrastructure PSUs could also see limited equity sales. 10 Janpath wants expenditure on the social sector to be increased, not least because of the Assembly elections that lie ahead. The cost of this is likely to be met largely through the sale of spectrum, which is expected to fetch around Rs 40,000 crore. It should also not come as a surprise if the RBI transfers a significant portion of its surplus to the Government. The RBI’s balance sheet has a surplus of Rs 15,000 crore. Thus, overall, it may well be a neutral budget, like the Railway Budget has been. 

 GOVT MAY EXTEND TAX HOLIDAY FOR SOFTWARE FIRMS

The Government may extend the tax holiday for software exporters beyond March 2010, in the Budget today. Analysts said extension of tax benefits will be a great relief to the IT sector, which is reeling under the impact of global financial crisis, which has resulted into fewer number of orders and sharp reduction in earnings. Official sources said though the industry has asked for five years of tax exemption, the Finance Ministry may grant it for two years. Currently software-exporting firms enjoy a tax holiday as their units are set up under the Software Technology Parks of India scheme, which entitles them to such a benefit. Major software exporting firms like Wipro, TCS and Infosys earn a major chunk of their revenues from meltdown hit western markets.

 BUDGET 2009: ADVICE TO AMEND CENVAT RULE

To allow Cenvat credit for welding electrode The benefits of the highly liberal Cenvat Rules, 2004, has not percolated to manufacturers using welding electrode. This article analyses the eligibility of welding electrode to Cenvat credit and how the change of rules during this Budget can solve the problem. One of the most unfortunate events is that the benefits of the highly-liberal Cenvat Rules, 2004, has not percolated to manufacturers using welding electrode. This is just because the CBEC did not have the alacrity to amend the most-outdated circular of 1992 in relation to welding electrode (which reiterates the circular of 1988). These circulars are based on the definition of inputs as in the Rule 57A of the Central Excise Rules, 1944. Unless something is completely used up in the final product, the old rule would not treat it as input. The Modvat system itself started in 1986. The new rules of 2004 very specifically define input as all goods except some specified items and capital goods." In the case of capital goods they have to be “used in the factory of the manufacturer of the final products”. In the case of other inputs they have to be “used in or in relation to the manufacture of final product or for any other purpose within the factory of production”. So this highly liberal Rule (which it should be) s just going waste and manufacturers are getting a raw deal. Even more unfortunate thing is that in July 2008, the Rajasthan High Court gave a beneficial judgement (I respectfully agree with it) holding that Cenvat credit for welding electrode is definitely admissible. The High Court relied on the judgement of the Supreme Court which has held that “they (inputs) need not be ingredients or commodities used in the processes, nor must they be directly or actually needed for turning out or the creation of goods”. Relying on the Supreme Court judgement, the Rajasthan High Court held that the expression “in the manufacture of goods” should normally encompass entire process carried on by the dealer or converting raw material into finished goods. I may further point out that the present 2004 rules are even more liberal than that because the Rules permit even “use in the factory” and “used in relation to manufacture”. So it is clear beyond all doubts that 1992 circular based on 1944 Rules should have immediately been rescinded. Therefore, the Department has been routinely following that circular and even the Tribunal has been confirming those decisions of the Department. I refrain from quoting tribunal judgements which, I must say, have turned a blind eye to the liberal Cenvat Rules of 2004. In 2008 one tribunal case went to the Supreme Court but the Supreme Court rejected it in limini without going into the merits. This is not really a law laid down by the Supreme Court as per Article 141 of the Constitution. Unfortunately, this judgement has been taken as a law in a very recent decision of the Cestat, Kolkata. At the same time I am happy that the Cestat in a very recent decision in the case of Aditya Cement vs. CCE, Jaipur has correctly held that the Rajasthan High Court judgement is to be relied upon because it is the only High Court judgement available and because the Supreme Court judgement is just a summary dismissal of a case and therefore does not lay down the law. The conclusion is that the board should immediately revise the 1992 circular. At the same time during this Budget the Cenvat Rules should be revised to include eligibility to the items used in repair and maintenance of machines.

  Tax-free bonds may go beyond IRFC

 Easier tax, bond rules for power sector

India is Asia's third-largest economy but continues to be crippled with huge power shortages ranging from 12 to 16 percent of peak demand.

Realising that the only way to go is through capacity addition, the government proposes to announce measures in the budget for 2009-10 to boost the availability of funds for this.

These could include increasing the exposure limits of banks to fund the sector and allowing tax-free bonds by financiers like the Power Finance Corporation and Rural Electrification Corporation.

PFC and REC may also be allowed to raise funds of $ 1 billion each per year under the “automatic route.”

The sector needs as much as Rs 10 lakh crore to meet capacity addition requirements of 78,000 megawatts (MW) in the 11th Plan that ends in 2012.

With the award of four ultra mega power projects (UMPPs) of at least 4,000 MW each, as much as Rs 64,000 crore is needed for these four UMPPs.

REC’s Chairman and Managing Director P Umashankar said his firm planned to raise Rs 23,000 to 25,000 crore this year. “This will be done through a combination of different instruments like infrastructure bonds, tax-saving certificates and external commercial borrowings (ECBs). Banks and financial institutions will also be approached,” he said.

The Budget is also expected to extend income tax incentives for power projects to help meet the Power Ministry’s target to add 14,507 MW in 2009-10.

The director-general of the Independent Power Producers Association of India, Harry Dhaul, said tax incentives should be extended to captive power plants.

Duty -free imports of transmission equipment required for new projects may also be announced.