Cut in I-T to boost FMCG sale

The FMCG sector's demand growth will be powered by effective reduction in the personal taxes and increased allocation under NREGA, though hike in excise duty lead inflation is a cause for concern.

Budget provisions

• Corporate tax surcharge down from 10% to 7.5%
• To further encourage R&D across all sectors of the economy, weighted deduction on expenditure incurred on in-house R&D enhanced from 150% to 200%.
• Allocation to National Rural Employment Guarantee Scheme (NREGA) increased to Rs 40100 crore
• New income tax slabs will bring relief to the middle class. The individual with the income of Rs 1.6 lakh will pay Nil tax, above Rs 1.6 lakh up to Rs 5 lakh will pay 10%, from Rs 5 lakh to Rs 8 lakh will pay 20% and above Rs 8 lakh, the rate will be 30%.  For a person with Rs 10 lakh as income, the tax savings will be Rs 50000, excluding the benefit of additional deduction for investment in eligible infrastructure bonds for Rs 20000/-
• Minimum Alternate Tax hiked from 15% to 18%.
• Standard excise rate up from 8% to 10%
• Goods and services tax to be introduced in 2011
• Direct tax code to be implemented from April 1, 2011
• External Commercial Borrowings to be available for cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat.
• In addition to the ten-mega food park projects already being set up, the Government has decided to set up five more such parks.
• Full exemption from excise duty presently available to 20 specified equipments for preservation, storage or transport of agricultural produce is being extended to apiary, horticultural, dairy, poultry, aquatic & marine produce and meat as well as processing thereof.

Cigarette and tobacco products

The existing slab of filter cigarettes of length not exceeding 70 mm is being broken up into two slabs: filter cigarettes of length not exceeding 60 mm; and filter cigarettes of length exceeding 60 mm but not exceeding 70 mm (Clause 74 of the Finance Bill refers).

Suitable rates are being prescribed for these slabs. The basic excise duty (BED) on other cigarettes is also being revised. The revised rates of excise duty including basic excise, additional excise and NCCD on cigarettes are as under:

BED, AED and NCCD stands for Basic Excise Duty, Additional Excise Duty and National Calamity Contingent Duty respectively.

• At present, cigars, cheroots and cigarillos of tobacco attract ad valorem rate of basic excise duty (BED) of 8% plus health cess of 1.6%. These rates are now being replaced with a composite rate of "10% or Rs.1227 per thousand, whichever is higher" (BED) and "1.6% or Rs.246 per thousand whichever is higher" (AED). Cigars, cheroots and cigarillos of tobacco substitutes will now attract BED of "10% or Rs.1473/1000" whichever is higher
• Basic excise duty on items of other smoking tobacco (branded) is being increased from 34% to 40%.
• Basic excise duty on smoking mixtures of pipes and cigarettes is being increased from 300% to 360%.
• Basic excise duty on cut tobacco is being increased from Rs.50 per kg to Rs.60 per kg
• Basic excise duty on manufactured tobacco other than chewing tobacco, preparations containing chewing tobacco, zarda scented tobacco, snuff and its preparations, tobacco extracts and essences etc and is being increased from 50% to 60%.
• The duty on other Pan Masala is being increased from 8% to 10%
• Basic excise duty on branded hookah or gudaku tobacco is being increased from 8% to 10%.
• The duty on other smoking tobacco (unbranded) is being increased from 8% to 10%.
• The duty on other manufactured tobacco and manufactured tobacco substitutes (unbranded) is being increased from 8% to 10%.
• The AED on cigars, cheroots and cigarillos of tobacco is being revised from 1.6% to "1.6% or Rs.246 per thousand whichever is higher".

Industry expectation

The industry were expecting hike in excise duty from 8% to 10% and service tax from 10% to 12%. Fortunately, there is no hike in service tax, which is a big relief. Also rise in excise duty on filter cigarette. There was also expectation of rise in MAT rate and delay in GST. There is expectation of higher allocation to National Rural Employment Guarantee Scheme.

Budget impact

The rise in the excise duty by 200 basis points will be neutral for most of the companies and impact will be very marginal on margin as most of the FMCG companies have effective excise duty incidence of less than 3% except HUL, which can be negatively affected with its higher sales coming from non excise free zone.

The rise in MAT will be negative to MAT paying companies like GCPL and Dabur. Hike in excise duty of filter cigarette is a concern, but the cigarette sector has been successful in passing on the hike without adverse impact on the volume.

Stock to watch

Hindustan Unilever (HUL), ITC, Godrej Consumer Product (GCPL), Dabur India, Marico and Nestle.

Outlook

The budget was not upto the mark of the FMCG sector. But the effective reduction in personal income tax will boost the disposable income in the hands of the consumer. This was a good step especially at the time of agri inflation, which was shrinking the wallet size of consumer.

Another big boost was allocation to National Rural Employment Guarantee Scheme, which increased to Rs 40100 crore (Rs 401 billion), thus helping the rural economy to grow, which was the main driver for sector growth during hard time of economy.

Though hike in excise duty on cigarette is negative, the industry has reconciled to it and is able to pass on to the customers. The industry was expectation the roll out of GST from April 2010, which has now been postponed to April 2011, has resulted in the disappointment for the sector. Overall, the budget was positive for the FMCG sector.