Budget 2012: 'I must be cruel only to be kind'

The government said it will provide capital support of Rs 15,888 crore (Rs 158.88 billion) to public sector banks and financial institutions during the next fiscal to strengthen their capital base.

"The government is committed to protect the financial health of Public Sector Banks (PSB) and financial institutions," Finance Minister Pranab Mukherjee said in the Lok Sabha today while presenting Budget 2012-13.

"For the year 2012-13, I propose to provide Rs 15,888 crore for capitalisation of PSBs, Regional Rural Banks and other financial institutions, including NABARD," he said.

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The literary pinch was probably to veil the fact that what was coming was more cruel and less kind! Let's look at what the FM had in store for businesses and industry.

The FM started off by saying that he is not touching the corporate tax rates and also gave positive input indicating measures for corporate to access funds at lower cost as well as incentives for higher level of investments in multiple sectors.

The sectors which have been given a breath of really fresh air are Power, Airlines, Roads and Bridges, Ports and Shipyards, Affordable housing, Fertilizer and Dams which have been given a relief by reducing the rate of withholding tax on interest payments of external commercial borrowings from 20 per cent to 5 per cent.

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What this means is that these sectors can now borrow from outside India with lower cost of servicing the borrowed sums.

Multi tier corporates like Reliance, Tata group, Birlas etc have been helped by removing the cascading effect of Dividend Distribution Tax.

What this means is that unlike the present where a company is forced to pay DDT at multiple levels of declaring dividend, parent company level, subsidiary level etc, now they will pay at one level only.

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For example if TCS declares a dividend and pays to its shareholding companies Tata motors or Tata sons, it has to pay DDT, again when Tata Sons declares a dividend, it is also bound to pay DDT. A bit like dual taxation again and again and again!!!

Foreign subsidiaries of Indian companies can now repatriate dividends at 15 per cent tax rate for one more year.

Industries like Cold chain, Warehouses for storing food grains, Fertilizers, Hospitals and Affordable housing have been given the benefit of a higher rate of 150per cent for investment linked deduction of capital expenditure.

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This has been done with the intention of improving investments in Agriculture supply chain related industries. High importance has been given to Agriculture and allied businesses and also the power sector.

Securities Transaction tax has been reduce by 20per cent to 0.1per cent.

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Now, comes the cruel part...

Service tax will attain adulthood this fiscal year, (it has been in existence since 17.5 years as of today), and has been made to grow. The Finance Minister has done a "Honey, I grew up the kids" by widening the tax base. He has also increased the rate of service tax rates to 12 per cent from the existing 10 per cent.

The concept of negative list seems to have been fully accepted and 17 sectors have been added to this list. This includes Education, Government services, Public transport, Renting of residential dwellings etc.

Apart from the hike in the standard rate, Mr. FM has also increased the merit rate from 5per cent to 6per cent.

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The FM has also increased the duty on large cars from 22per cent to 24per cent and for some cars to 27 per cent ad valorem. This will affect the luxury brands like Audi, BMW etc.

Initiatives for specific sectors of business – a quick take

Agriculture – Overall a lot of positive points to take away

Infrastructure – Multiple exemptions for fuels like NG, LNG and Uranium

Mining – support for surveying and prospecting

Railways – Impetus for boosting safety and service delivery

Road industry – Exemptions given for road construction equipment

Civil aviation – Mostly positive things

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Manufacturing – Proposals with the intention of cost reduction for raw materials and inputs and capital cost

Textile – Positive proposals to improve modernisation

Branded retail – Taxes as a component of Retail sale price to come down by 0.9per cent

Bicycle – Customs duty rose to 30per cent for cycles and 20per cent for parts – negative effect on manufacturers depending on imports

Health and Nutrition – Positive measures by reducing/removing customs duty for drugs and equipment.

How cruel or how kind the budget truly is will be known once we analyse the entire finance bill. Keeping reading this space for more in-depth analysis.