The Budget 2012-13 was presented under the backdrop of economy’s recovery being interrupted due to debt crisis in the Euro zone, political turmoil in Middle East, rise in crude oil prices, earth quake in Japan and overall gloomy environment. Impacted by the global crisis, India’s Gross Domestic Product (GDP) is estimated to grow by 6.9% in FY 2012 after having grown at the rate of 8.4% in each of the preceding two years. Despite this slowdown in FY 2012, in cross country comparison, India still remains amongst the highest grown economy.
Internally, the main reason which affected the growth was the near double digit headline inflation, which was there in major part of the year. It was moderated to 6.95% in February 2012. As a result, a tight monetary policy was followed which impacted investment and consumption. The fiscal balance deteriorated in FY 2012 to 5.9% of GDP due to slippage in direct tax revenue target, lower disinvestment receipts and increased subsidies due to higher oil prices.
The silver lining, however, is the fact that agriculture and services continues to perform well and the slowdown is due to weak industrial growth. The growth is estimated to be 2.5% in agriculture, 3.9% in industry and 9.4% in services. However, indicators suggest that economy is now turning around as core sectors i.e. coal, fertilizers, cement and electricity are showing signs of recovery and Indian manufacturing appears to be on revival path. Also, the headline inflation is expected to moderate further in FY 2013 and likely to remain stable thereafter.
Twelve Five Year Plan is being launched along with the current budget proposal for FY 2013 aims at “faster, sustainable and more inclusive growth”. In line with that, in the ensuing fiscal year, five priorities have been identified:
On the macro economy level, the GDP growth for 2012-13 have been estimated at 7.6%, + /- 0.25% and the fiscal deficit is targeted at 5.1% of GDP at Rs. 5,13,590 crores. This deficit would be met out of additional borrowing Rs. 4.79 Lakh crores, which would take the total debt by the end of FY 2013 to about 45.50% of GDP. The total revenue deficit is estimated at Rs. 3,50,424 crore (3.4% of GDP), however, after taking out grant for creation of capital asset of Rs. 1,64,672 crores, the net effective revenue deficit in FY 2012-13 is estimated to be at Rs. 1,85,752 crores, about 1.80% of GDP.
Some of the proposals of the Budget and its impact on the Textile sector are given below:
The service sector is an important part of the economy, especially considering that share of services in GDP is 59%. The Finance Minister was of the opinion that the service tax remains far below its potential and there is a need to widen its tax base and strengthen its enforcement. In order to harmonize and align Central Excise and Service Tax and also as an eventual transition to GST, the Service Tax is made applicable to all services except those in the negative list. The list contains 17 heads drawn up carefully, keeping in view the federal nature of our policy, best international practices and socio-economic requirements.
To strengthen the fiscal situation, the service tax has been increased to 12% from the existing rate of 10%. This is expected to yield additional revenue of Rs. 18,660 crores.
Custom Duty Proposals
Following are the custom duty proposals relating to Textile sector:
The Full exemption to new automatic shuttle less looms as against basic custom duty of 5% will bring down the landed cost of machinery and induce industry players in making investment in latest technology available overseas.
The detailed custom duty tariff is given in Annexure - I
Excise Duty Proposals
i) Increase in Excise Duty Rates:
Considering the need for fiscal correction, the standard rate of Central Excise Duty has been raised to 12% from the existing level of 10%. In addition, the merit rate has been increased to 6% from 5% and lower merit rate from 1% to 2%.
This would result in increase in Polyester yarn duties to 12% from present 10%. The effective rate after considering Education cess would be 12.36% from present 10.30%.
ii) Reduction in effective rate of excise duty on branded garments and made ups:
Presently, excise duty of 10% is applicable to branded ready-made garments with abatement of 55% from the Retail Sale Price. In the budget, the excise duty rate has been increased to 12% with the enhancement in abatement to 70%. As a result, the incidence of duty as a percentage of the Retail Sale Price would come to down to 3.6% from present 4.5%.
As the effective duty is coming down by 0.90% of the Retail Sale Price, the cost in the hand of the consumer would be lower to that extent and this coupled with lower cotton prices compared to last year is likely to stimulate the demand.
The detailed Excise duty tariff is given in Annexure – II
The proposals relating to Customs and Central Excise are estimated to result in a net revenue gain of Rs. 27, 280 crores.
i) Corporate Tax Rates:
ii) Personal Income Tax:
a) Exemption limit for the general category of individual tax payers enhanced from Rs. 1,80,000/- to Rs. 2,00,000/- giving uniform tax relief of Rs. 2000/- to every tax payer. The revised slab for individual taxation is as under:
b) Deduction of upto Rs. 10,000/- for interest from savings bank accounts with salary income upto Rs. 5 Lakhs.
c) The Rajiv Gandhi Equity Saving Scheme will incorporate 50% income tax deduction for retail investors in the equity markets up to an amount of Rs. 50,000. This is valid for individuals with annual income of less than Rs.10 lakhs.
d) Deduction upto Rs. 5,000/- for preventive health check- up within the existing limit for deduction allowed for health insurance.
e) Senior citizens not having income from business are exempted from payment of advance tax
The turnover limit for SME for compulsory audit of accounts as well as for presumptive taxation is increased from Rs. 60 lakhs to Rs. 1 crore. Security Transaction Tax (STT) has been reduced by 20% from 0.125% to 0.1% on cash delivery transactions. Also, series of measures have been announced to deter the generation and use of unaccounted money.
The direct tax proposals would result in net revenue loss of Rs. 4500 crores. However, it would result in higher disposable income in the hands of individual and hence likely to boost the consumption levels, encourage savings and would attract additional funds for the capital markets.
Other Proposals for Development of Textiles:
Further, Ministry of Textiles has recommended continuation of TUFS with an allocation of Rs. 15886 crore for the entire 12th Five Year Plan against the allocation of Rs. 15404 crore during 11th Five Year Plan.
If the above recommendation is accepted, the TUFs scheme would be continued in next 12th Five Year Plan. This would motivate the players in the Industry to make further investments, looking to the opportunity available both in the overseas and domestic market. It would be beneficial to Alok, to the extent of any capital expenditure that would be announced under TUFs.
Implication of Proposals of Budget 2012-13 on Alok Industries Ltd.
Alok’s operates in the following textile segments:
The effects of the budget proposals on Alok are as under:
i) Effect of Excise Duty:
a) The excise duty on cotton yarn and cotton fabric has been increased from 5% to 6%. After considering the education cess of 3%, effective rate has increased from 5.15% to 6.18%. However, duty on cotton products is optional in nature, i.e. the companies can opt for either zero (exemption route) duty or regular (cenvatable) excise duty. Since, the company has opted for exemption route for its cotton products for the domestic market, the increase of 1% would have no impact on the company.
b) In polyester segment, however, the excise duty has been increased to 12% from 10%. After considering the education cess of 3%, effective rate has increased from 10.30% to 12.36%. Given the fact that there is huge gap between the cost of cotton yarn and polyester yarn (more than 100%), the polyester industry should be able to pass on this increase in duty to the end consumer.
c) The reduction in effective rate of duty from 4.5% to 3.6% in case of branded garments and made ups is beneficial for Alok’s retail subsidiary- Alok H&A Ltd., which sells branded garments and made ups in the domestic market under its store brand ”H&A” and private labels. This is expected to reduce the price of garments and made ups in the hand of customers and thus, boost demand.
ii) Effect of Custom Duty: The Full exemption to new automatic shuttle less looms is beneficial for Alok’s Apparel Fabrics (woven) division as this would reduce the landed cost of the machinery.
iii) Effect of Service Tax: The widening of the tax base and increase of 2% from 10% to 12%, would increase overall cost of the company as more or less every service being availed by it comes under the bracket. However, since the same is Modvatable, the net impact would be marginal.
There has been no change in the direct tax rates; hence, there is no impact on us.
Custom Duty on Textile Items w.e.f. 17.03.2012
Above duties include Education cess of 3%.
The CVD (Counter Veiling Duty) has been increased from 10% to 12% wherever applicable (man made products).
All items except fabric attract additional 4% SAD
Exempt from educational cess
PSF – Polyester Staple Fibre
VSF- Viscose Staple Fibre
POY- Partially Oriented Yarn
PTA- Purified Terphtalic Acid
MEG- Mono Ethylene Glycol
NFY – Nylon Filament Yarn
PV – Polyester Viscose
Excise Duty on Textile Items w.e.f. 17.03.2012
The goods which were under concessional central excise duty rate of 5% are now being subject to 6%.
Excise duty on cotton yarn and fabric is optional in nature, i.e. the companies can opt for either zero (exemption route) duty or regular (cenvatable) excise duty.
Above duties include Education cess of 2% and Higher Education Cess of 1% except in case of fabric (woven and knits).