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Rediff.com  » Business » Chemicals: Budget fails to act as catalyst

Chemicals: Budget fails to act as catalyst

July 07, 2009 12:44 IST

Contrary to expectations of the chemical sector, Budget turned non event with no major sector specific changes, except in petrochemicals which was necessitated for MMF sector.

The following changes in the duties have been proposed in the Union Budget 2009-10:

  • Customs duty on rock phosphate to be reduced from 5% to 2%
  • Excise duty on naphtha to be reduced to 14%.
  • Excise duty on PTA and DMT to be increased from 4% to 8%.
  • Excise duty on acrylonitrile to be increased from 4% to 8%.
  • Excise duty on paraxylene to be maintained at 4%
  • Minimum Alternate Tax (MAT) to be increased to 15% of book profits from 10%. The period allowed to carry forward the tax credit under MAT to be extended from seven years to ten years
  • Fringe Benefit Tax (FBT) on the value of certain fringe benefits provided by employers to their employees to be abolished.
  • Introduction of the Goods and Services Tax (GST) with effect from 1st April, 2010

Industry expectations - Not fulfilled

None of the expectations were fulfilled

Budget impact

No sector specific announcement was made in the budget 2009-10. So it has a neutral impact on the sector.

The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector.  On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.

Also, the hike in MAT will not be earnings dilative but will only be cash flow dilative.  The increase in liability towards MAT will be matched by an incremental deferred tax credit.  Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.

But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them.

So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilative but cash flow dilative. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Stocks to watch

Castrol India; BOC India; Beck India; Foseco India; BASF India; Industrial Organics

Outlook

Indian economy is passing through a difficult phase due to global economic meltdown. Due to this global meltdown demand destruction is widespread across US, EU, China and Middle East leading to excess capacity across many product segments of the chemical industry.

Chemical industry players from Middle East countries with their huge feedstock cost advantage are looking at India as an attractive destination for their products since export demand from China, Europe and other traditional destinations have dried-up.

Indian economy has been rapidly opened up to global suppliers while internal reforms are progressing at a relatively much slower pace. This has made local market more accessible to overseas suppliers than to Indian producers. It is in this context Industry had expected major support from the government to remain in business. However no major announcements were made in the Union budget 2009-10.

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