Union Budget 2003-04 – Marico’s Comments - Views on News from Equitymaster

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Union Budget 2003-04 – Marico’s Comments

Feb 28, 2003

Highlights
The Budget has been a good effort, although it has not fully lived up to the expectations that it had generated. The format of the Budget Speech was refreshingly different and the tone was positive. However, there is a lurking doubt whether the overall ambience of “All’s well” and “Things were never better” was somewhat misplaced.

The Budget is oriented towards growth through focus on Infrastructure, in both tangible areas like logistics infrastructure and Social areas like Health care, with a large number of schemes and the planned expenditure. However, administration of the various measures announced is crucial to achieve the stated objectives of poverty elimination & rural development.

Impact on FMCG Industry
There are many positives for the FMCG Industry. Consumer demand may be spurred by the increased expenditure on infrastructure and Health Care with special focus on Senior Citizens. Rural/Small scale credit cost reduction would also help create new demand. The reduction in surcharge rate will result in a small increase in the disposable income although the increase in the tax rate for the High-Income group is a regressive step.

The big negative, however, is the levy of excise on branded edible refined oils. This will not only push up costs, but also increase the imbalance between the branded and the unbranded sectors. This is clearly a retrograde step. The cost structure of the industry will get further skewed – already it is suffering from the Government’s lack of will to mandate packaging in Edible Oils, despite an order, issued in 1998 as a result of the dropsy disaster. The industry already contributes over Rs. 5000 crore to the Import Duty kitty and does not deserve an additional levy, also because Oil is an item of daily & necessary consumption.

The increase in service tax from 5% to 8% without input credit would create some cost-push. This may be off-set by the reduction in excise duty in several input areas as also by the decrease in peak customs duty.

The proposed VAT and CST measures are welcome steps, although the readiness of the fiscal machinery to administer these changes is somewhat suspect. The de-reservation of many items from the small-scale reserved list will help economies of scale and integrated operations.

The exemption of long-term capital gains tax is a progressive measure but its actual realization is quite some time away. Abolition of Dividend Tax in the hands of Shareholders is a welcome step. However, the rate of taxation of dividends in the hands of the distributing company is now higher at 12.5%. In the reducing tax rate regime, this appears incongruous. The expectation that corporate taxation rates will be reduced has not been fulfilled, nor has removal of MAT materialized. Reduction of surcharge on Income Tax is too small an incentive.

Impact on Marico
Details are still awaited, but the net impact on Marico is somewhat negative, largely because of the excise on branded refined edible oils- (Saffola and Sweekar). However, positive moves in taxation of dividends will benefit shareholders Marico (a high dividend Payout Company). The net impact on the Marico Shareholders is expected to be somewhat positive.


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