Some chlor alkali producers using naphtha as feedstock for captive power plant will benefit from cut in the excise duty on naphtha from 16% to 14%.
- The following changes in the duties have been proposed in the Union budget 2009-10:
- Cut in excise duty on Naphtha from 16% to 14%
- 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 by the industry.
Budget had negligible impact on the chlor alkali sector.
The cut in excise duty on naphtha has been cut from 16% to 14%. This will benefit players using naphtha as feedstock for captive power generation. But there are few such players, and most of them use either coal or other alternate feed stocks like LSHS, furnace oil, fuel oil etc.
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 dilutive but will only be cash flow dilutive. 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 dilutive but cash flow dilutive. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.
Stocks to watch
Gujarat Alkalies and Chemicals, Tata Chemicals, GHCL, Kanoria Chemicals
Chlor Alkali industry growth is directly related to growth of economic activity in general. Although economic activity has slowed down due to global recession domestic demand still remains significant. Major concern of Chlor alkali is power cost and usage of chlorine (produced as by product of Caustic Soda).
Most of chlor alkali plants have built up their own captive plants. However benefits are taken away by various state level taxes. Union budget 2009-10 is neutral to the chlor alkali sector.