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Rediff.com  » Business » Sugar: Budget will benefit select firms

Sugar: Budget will benefit select firms

July 07, 2009 15:24 IST

Players in the midst of expanding / setting up cogeneration power plant will benefit from the extension of the terminal date for 80-IA benefit by one year upto 31st March 2011.

Budget provisions

  • Extending the terminal date for starting the power generation by cogen plant upto 31-03-2011
  • The budget proposes to abolish FBT (Fringe Benefit Tax).
  • Minimum Alternate Tax hiked from 10% to 15%
  • Service Tax to be imposed on the following services: (a) Service provided in relation to transport of goods by rail (b) Service provided in relation to transport of coastal cargo; and goods through inland water including National Waterways

Industry expectations

The premier sugar body in the country Indian Sugar Mills Association (ISMA) has raised following demands with the finance ministry for union budget 2009-10:

  • To include Ethanol in the list of declared goods.
  • To grant exemption of service tax on goods transport to the sugar industry.
  • To cover the ethanol projects under section 80-IA of the Income Tax Act and extend the income tax benefit to the Ethanol Projects as well in form of income tax exemption.
  • Promotion of Ethanol as a biofuel by the government.
  • Weighted deduction of 150% of the cost incurred for Construction of Roads in Rural Areas by sugar companies.
  • To extend the terminal date for section 80-IA benefit for cogen plants by 5 years i.e. upto 31st March 2015 for starting the generation of power.
  • No budget expectations for the sector has been fulfilled except extension of terminal date for starting the power generation by cogen plant by one year i.e. upto 31-03-2011, though the industry demanded five year extension.

Budget impact

The Union Budget 2009-10 has proposed to extend the terminal date for starting the power generation by cogen plant by one more year i.e. upto 31-03-2011. The cogeneration projects get the benefit of tax exemption for 10 years u/s 80-IA of the Income Tax Act, however this benefit was available only if power generation begins before 31st March 2010.

Now it has been extended by one year and now the cogen plants which will start power generation by 31st March 2011, would be eligible for Section 80-IA benefits of Income Tax Act. This will benefit the companies whose cogen plants will start power generation by March 2011.

However, the industry demanded the extension of this facility by 5 years i.e. upto 31st March 2015 so that the new investment could be made for setting up cogen plants, but it has been extended by only one year.

Just before the budget, the SMP (Statutory Minimum Prices) has been increased to Rs 107.76 a quintal for sugar season 2009-10 from Rs 81.18 a quintal in 2008-09 sugar season. The levy price, or the price at which sugar is sold to the government, which is 10% of production, is based on SMP prices. Such an upward revision in cane SMP should increase levy prices by Rs 2-3/kg from the current Rs 13.8/kg.

Further in Union Budget 2008-09 i.e. last year, the government proposes the abolition of tax on cash withdrawals from the bank, which has come in effect from 1st April 2009.

The levy of service tax on service provided in relation to transport of goods by rail (b) Service provided in relation to transport of coastal cargo; and goods through inland water including National Waterways can affect some players.  But most of them are transporting sugarcane as well as sugar by road, which is also impacted by rise in petrol and diesel prices recently.

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.

Outlook

All the demands of the sugar industry have been ignored by the Union Budget 2009-10 except partial extension of terminal date for Section 80-IA benefit, so the outlook for the sector will remain budget neutral. However increase in SMP just before the budget is likely to increase the minimum cost for the sugar companies who pay for sugar cane based on SMP. Though, atleast for coming sugar season 2009-10, the cane cost is expected to remain higher than SMP based cost.

Considering the higher sugar prices, a cause of concern for government due to sensitivity to inflation, not much positive benefits were expected from the Union Budget.

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