By the time you read this article, you would have seen price rise across the board!! What's the reason? Is it due to the partial rollback of fiscal stimulus package further flared by much feared increase in prices of petroleum products? This would have thrown up many questions in the readers' mind on the sustainability of the Indian growth story, given the strong performance in the recent month running up to the Budget.
While one may conclude that FM has done something unwarranted, the answer is not so simple. If product prices are rising, share prices are rising as well. So, what is it in the Budget that has thrown up this contradictory phenomenon: rise in product prices coupled with share prices? Auto sector, which is immediately impacted due to 2 per cent rise in excise duties and increase in prices of petroleum products, could be a good example to analyse this.
Auto companies have passed on the increase in excise duty to the customers. Still auto majors have gained in stock markets. Well, possible reason could be increase in disposable income of consumers with significant relief on personal taxation. It would be important to consider two more aspects typical to the Indian auto market. Many car buyers in India are first time buyers. Since, FM has not fully rolled back excise duty benefits provided under stimulus package, price hike may not be significant enough to change minds of first time car buyers. Indian auto market is largely driven by credit market and increase in EMI may not be significant given the modest rise in excise duty. Thus, significant relief on personal taxation front could possibly outweigh negative factors. In addition, the excise duty rollback is only one third of the total cut (6 per cent) doled out through the stimulus package. Hence, this partial rollback was factored in. There were no further negative surprises in the budget. This may be reason for positive sentiments in stock market.
It would be important to touch upon other significant budget proposals relevant for auto sector. While corporate income tax rates remain unchanged, reduction of surcharge on domestic companies from 10 to 7.5 per cent would lessen the tax burden. However, Minimum Alternate Tax (MAT) increases from 15 to 18 per cent, offsetting the benefit due to reduction in surcharge.
One of the budget proposals enhances weighted deduction for eligible companies having an approved in-house R&D unit from 150 to 200 per cent of the expenditure incurred. This would stimulate additional investment in R&D activity paving way for innovation. With the growing trend towards providing advanced driver assistance features, safety and comfort features in vehicles, continuous innovation and adoption of new systems will be vital to retain competitiveness in the automotive industry. Certain companies were required to call back large number of vehicles in recent past due to technology issues. This tax measure could possibly work as a fillip to increase focus on R&D in long term resulting in better technology products.
This budget has also put to rest the anomaly regarding computation of export profits leading to dilution of tax holiday for units in Special
Economic Zones, retrospectively with effect from 1 April 2006. However, there has been no extension of tax holiday for export oriented units which could have possibly been a relief for small auto units with export focus.
It has been clarified that income from technical services rendered by a non resident would be deemed to accrue or arise in India whether or not services are rendered in or outside India or non-resident has a place of business or business connection in India.
Increased allocation for infrastructure and agriculture sectors would propel demand for commercial vehicles and tractors. Further, additional employment opportunities and growth in rural economy would also fuel auto growth.
FM has also restated his commitment to implement GST and DTC from 1 April 2011, which provides some amount of certainty about structural changes in pipeline. One can look forward to a simple, transparent and easy indirect tax regime under GST.
While immediate reaction from stock markets is positive for auto sector, which may be due to only partial rollback of stimulus package and relief in personal taxation, it needs to be seen that whether the party continues for auto makers or whether the fantastic growth rate before the budget announcement was triggered by fears of increase in auto prices due to rollback of stimulus package.
Source : The Economic Times