Union Budget 2016

KEY PRIORITIES AREA
AND
PROGRAMS

“ 9 KEY PILLARS ”
FOR GOVERNMENT OF INDIA

“ 7 KEY PROGRAMS ”
BY GOVERNMENT OF INDIA

“14+ SCHEMES”
OF GOVERNMENT OF INDIA

“ 4 CESS ”
LEVIED BY GOVERNMENT OF INDIA

“ BUDGET MATH ”
The budget is building an 11.7% growth in the gross tax revenues which seems realistic, given
the assumption of a nominal growth of 10% in the gross domestic product (GDP) during
FY2016-17. However, the budget pegs close to a 25% growth in the non-tax revenues, thereby
resulting in a growth of 15.5% in the total net receipts for the year

“ BUDGET MATH ”
Fiscal deficit targets retained: The fiscal deficit target for FY2017 has been maintained at 3.5%
which itself is a tall order in the current environment but will be taken positively by the rating
agencies and foreign investors.
Revenue deficit improved in FY 2016: The government has been able to reduce the revenue
deficit to 2.5% of the GDP in FY2016 (vs 2.8% budgeted) aided by a strong growth in the
indirect taxes (up 28.6% YoY)
Capital spending to sustain, rural/social schemes gain prominence: On the expenditure front,
the government seems to be throwing weight behind capital spending even being mindful of
the social sector objectives. It plans about a 15% increase in the planned expenditure with
focus on agriculture, irrigation, employment and health aspects (plan, non-plan bifurcation
will be done away from FY 2018).

“ BUDGET MATH ”
Hits and misses (macros)
POSITIVES
1. Fiscal prudence with significant capital spending and rural development allocation: The budget proposes to
continue on path of fiscal prudence with a revised fiscal deficit estimate of 3.9% for FY2015-16 and that of 3.5% for
FY2016-17. Thus, it has maintained macro stability in the face of global uncertainties and higher expenditure on the
rural side along with the burden of the proposed pay hikes to government employees.
2. Net government borrowings of Rs4.25 trillion lower than expected: The gross government borrowing figure of Rs6
trillion and the net borrowing figure of Rs4.25 trillion are lower than the market’s expectations. In addition to
adhering to fiscal prudence and lowering the government’s market borrowings, it leaves enough room for the RBI to
take ahead its accommodative monetary policy and the bond market has reacted positively.
3. No change in capital gains tax on equity and stress on allaying fears on retro tax: Again the finance minister has
avoided changing the capital gains tax regime on listed equity investments as was speculated by a section of the
media and market participants. This is a big positive for equity investors.
NEGATIVES
1. Additional tax of 10% on dividend earnings of over Rs10 lakh and hike in STT on options: The budget proposes to
generate additional revenues by putting extra tax burden of 10% on dividend earnings of over Rs10 lakh per annum
which is double taxation in the hands of equity investors. Also, there is a proposal to increase the STT from 0.017%
to 0.05% now.
2. Continued uncertainty on implementation of GST: Unlike the past two budgets, the finance minister has avoided
highlighting the implementation of the GST in this year’s budget speech. Clearly, there still lacks a political
consensus on the implementation of the key indirect tax reform.
3. Allocation of PSU recap limited to Rs. 25,000 Crore initially: The market was expecting the finance minister to
allocate greater resources to recap the public sector banks (PSBs) to deal with asset quality issues and strengthen
the backbone of the economy.

“ PERSONAL TAX ”
The tax slabs, surcharge and education cess remain unchanged. For larger individual tax payers, the income
tax surcharge has been increased from 12% to 15% where the income exceeds Rs. 1 Crore per annum.
1. Relief to small tax payers: With a view to giving relief to small tax payers, the budget has announced a rebate under
section 87A from Rs2,000 to Rs5,000 to lessen the tax burden of individuals with income of up to Rs5 lakh and The
limit of deduction of rent paid under section 80GG has been increased from Rs24,000 per annum to Rs 60,000 per
annum to provide relief to those who live in rented houses and do not have House Rent Allowance as a component
of their salary.
2. First home buyers: An additional deduction of Rs50,000 per annum has been given on interest for loans of up to
Rs35 lakh sanctioned between April 1, 2016 to March 31, 2017, provided the value of the house does not exceed
Rs50 lakh. The existing provision under section 80EE provides a deduction of Rs1 lakh.
3. Dividend tax on persons with higher income: It is proposed that in addition to the dividend distribution tax paid by
the companies, tax at the rate of 10% of the gross amount of dividend will be payable by the recipients, i.e.
individuals, HUFs and firms receiving dividend in excess of Rs10 lakh per annum.

“ CORPORATE TAX ”
1. PRESUMPTIVE TAXATION:
• Turnover for presumptive taxation increased to Rs. 2 Crores.
• Presumptive taxation schemes introduced for all Professionals with receipts up to Rs 50 lakhs.
• Assessee opting for computation on presumptive basis shall be required to pay Advance Tax in one installment
on or before 15th March.
2. NEW MANUFACTURING COMPANIES:
• New manufacturing companies established or/post 1st March 2016 proposed to be given an option to be taxed
@ 25% plus surcharge and cess provided they do not claim any profit linked deductions and not claiming
accelerated depreciation.
• For small business with turnover less than Rs 5 Crore corporate tax reduced to 29% plus surcharge and cess.
• Start ups to get 100% tax exemption for 3 years. However MAT will be applicable for startups that qualify for
100 per cent tax exemption.
• Capital gains exemption proposed for investments in start ups.
3. TAX AUDIT U/S 44AB FOR PROFESSIONALS:
• It is proposed to increase the threshold limit of total gross receipts, specified under section 44AB for getting
accounts audited, from Rs. 25 Lacs to Rs. 50 Lacs in the case of persons carrying on profession
4. SECURITIES TRANSACTION TAX (STT):
• It is proposed to increase the rate of STT where option is not exercised from 0.017% to 0.05%.
5. ADVANCE TAX & INTEREST U/S 234C:
• It is proposed that the date of advance payment by all assessee’s shall be uniform. Now non corporate
assessee’s shall also be required to deposit advance tax in four installments.
• Assessee in respect of eligible business referred to in section 44AD opting for computation of profits or gains of
business on presumptive basis, shall be required to pay advance tax of the whole amount in one installment on
or before the 15th March of the financial year.

“ CORPORATE TAX ”
7. BLACK MONEY:
• Committed to providing a stable and predictable taxation regime and reduce black money.
• Domestic taxpayers can declare undisclosed income or such income represented in the form of any asset by
paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed
income. Declarants will have immunity from prosecution.
• Surcharge levied at 7.5% of undisclosed income will be called Krishi Kalyan surcharge to be used for agriculture
and rural economy
8. NEW DISPUTE RESOLUTION SCHEME TO BE INTRODUCED:
• No penalty in respect of cases with disputed tax up to Rs. 10 lakh. Cases with disputed tax exceeding Rs 10
lakh to be subjected to 25% of the minimum of the imposable penalty. Any pending appeal against a penalty
order can also be settled by paying 25% of the minimum of the imposable penalty and tax interest on quantum
addition.
• Mandatory for the assessing officer to grant stay of demand once the assesse pays 15% of the disputed
demand, while the appeal is pending before Commissioner of Income-tax (Appeals).
• Monetary limit for deciding an appeal by a single member Bench of ITAT enhanced from Rs. 15 lakhs to Rs. 50
lakhs.
• Time limit of one year for disposing petitions of the tax payers seeking waiver of interest and penalty
9. OTHER PROVISIONS:
• Disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but
not exceeding the actual expenditure claimed under rule 8D of Section 14A of Income Tax Act.
• High Level Committee chaired by Revenue Secretary to oversee fresh cases where assessing officer applies the
retrospective amendment.
• One-time scheme of Dispute Resolution for ongoing cases under retrospective amendment.
• Penalty rates to be 50% of tax in case of underreporting of income and 200% of tax where there is
misreporting of facts.

“ TDS PROVISION ”
INCREASE IN THRESHOLD LIMIT
CHANGE IN TDS RATE

“ DIRECT TAX ”
Hits and misses (macros)
POSITIVES
1. Infrastructure/Roadways: Investments of Rs97,000 Crore in roads and Rs2,21,000 Crore in the overall infrastructure. The government
has a target to approve nearly 10,000km of national highways in the year 2016-17. No dividend distribution tax if special purpose
vehicles (SPVs) give dividends to real estate investment trusts (REITS). Companies in focus: IRB Infrastructure, ITNL, L&T, Ashoka
Buildcon, Gayatri Projects, Sadbhav Engineering and DLF.
2. Rural consumptions: With focus on improving rural areas, the government has increased allocation on various schemes, such a
Mahatma Gandhi National Rural Employment guarantee Act (MNREGA), irrigation funds and other schemes. Further, 100%
electrification of villages by 2018 is a significant step forward. Accelerated rural investments and job creation will result in a higher
consumption power and thereby benefit rural demand focused companies. Companies in focus: Hindustan Unilever Ltd (HUL), Dabur,
Emami, Godrej Consumer Products, Jyothy Laboratories and Britannia Industries, and to certain extend two-wheeler companies (Hero
MotoCorp and Bajaj Auto) and Mahindra & Mahindra (M&M).
3. Irrigation: Emphasise on irrigation through irrigation fund, implementation of 89 irrigation projects under Accelerated Irrigation
Benefits Programme (AIBP) to fast track and Pradhan Mantri Krishi Sinchai Yojana (28.5 lakh hectares will be brought under irriagtion).
Companies in focus: Jain Irrigation, Finolex Industries and Supreme Industries.
NEGATIVES
1. Autos: Levy of infrastructure cess to the extent of 1% on petrol cars and 2.5% on diesel cars, and reduction in R&D exemption limits
from 200% to 150%, seem as a negative. Further, levied tax at source at 1% on luxury cars priced above Rs10 lakh and absence of
announcement on incentive for scrapping of old vehicles are other negatives for sector. Companies in focus: Maruti Suzuki, M&M, Tata
Motors and Ashok Leyland among others,
2. Cigarettes: Tobacco product manufacturers would attract higher excise duty (fifth consecutive year of increase), thus putting pressure
on these companies to increase prices. In the budget excise duty increased by 10%, however it is much lower than 16-20% excise duty
hike implemented in the earlier years. Further, with no price hikes in the last six months, companies will swiftly pass on the excise hikes
to the consumers in the coming months. Companies in focus: ITC and Godfrey Phillips.
3. Oil and Gas: The cess on domestically produced crude oil is revised from currently fixed structure (Rs4,500/ PMT) to ad velorem
structure at 20% rate, which was expected to be 10%. Companies in focus: ONGC and Oil India.
4. Excise duty on ATF increased to 14% from 8%. Companies in focus: Jet Airways, Indigo and SpiceJet.

“ CHANGE IN SERVICE TAX ”
Legislative changes have been introduced under clauses 145 to 157 the detailed analysis of
the said changes will be circulated shortly.
• Introduction of ‘Krishi Kalyan Cess’ (KKC): With effect from 1.06.2016 KKC is proposed to be
levied on all taxable services @ 0.50% on the value of taxable services effectively the
service tax now would be chargeable @ 15% (Basic 14% + SBC 0.50% + KKC 0.50%) w.e.f. 1st
June’2016.
• Under clauses 157 of the Finance Bill 2016 the retrospective amendment from year 2012
has been proposed to validate the Notification No.01/2016-ST issued on 3rd February 2016,
in connection with allowing the refund claim on Export of Services. These changes will help
to set aside all the litigations in connection with service tax refunds.
• Service Tax exemption on canal/dam and other irrigation and project work has proposed to
be amended retrospectively.
• The exemption in respect of services provided by Senior Advocate to an advocate or
partnership firm of advocates and a person represented or an arbitral tribunal to an arbitral
tribunal has been withdrawn.
• The changes in connection with additional exemptions / Service Tax Rules’1994 / Point of
Taxation Rules,2011 will be circulated shortly.

“ CHANGE IN CENVAT ”
THE CENTRAL EXCISE RULES, 2002 ARE BEING AMENDED SO AS TO:
• (a) reduce the number of returns to be filed by a central excise assessee above a certain threshold from 27 to
13, that is, one annual and 12 monthly returns. Monthly returns are already being e-filed. CBEC will provide
for e-filing of annual return also. This annual return will have to be filed by service tax assessees also, above a
certain threshold, taking total number of returns to three in a year for them,
• (b) extend the facility for revision of return, hitherto available to a service tax assessees only, to manufacturers
also.
• (c) provide that in cases where invoices are digitally signed, the manual attestation of copy of invoice, meant
for transporter, is done away with.
• (d) provide that in case of finalization of provisional assessment, the interest will be chargeable from the
original date of payment of duty.
OTHER PROVISIONS:
• The CENVAT Credit Rules, 2004 are being amended, so as to improve credit flow, reduce the compliance
burden and associated litigations, particularly those relating to apportionment of credit between exempted
and non-exempted final products / services. Changes are also being Taxcon made in the provisions relating to
input service distributor, including extension of this facility to transfer input services credit to outsourced
manufacturers, under certain circumstances.
• The amendments in these Rules will also enable manufacturers with multiple manufacturing units to maintain
a common warehouse for inputs and distribute inputs with credits to the individual manufacturing units.
• Instructions are being issued to Chief Commissioners of Central Excise to file application to Courts to withdraw
prosecution in cases involving duty of less than rupees five lakh and pending for more than fifteen years.

“ CHANGE IN INDIRECT TAX ”
EFFECT OF 10% INCREASE IN EXCISE DUTY ON CIGARETTES ON ITC
• In the Union Budget 2016-17, the government undertook an average excise duty hike of 10% in cigarettes, which is
less than our as well as Street expectation of 15-18% for FY2017. Further, the rate hike of 10% is much lower than 16-
20% excise duty hike implemented in the earlier years.
• For ITC, weighted average excise duty hike stands at 10%. We expect ITC to pass on the excise hike through an average
price increase of 10% in the cigarette portfolio in the coming months. Also, the company has not undertaken any
significant price increase in the past six to eight months, which provides it a cushion to take prudent price increase in
the coming months.
• We have broadly maintained our earnings estimates for FY2016 and FY2017. We have factored in a volume decline of
2-3% for FY2017, which will lesser than 12% volume decline expected for FY2016 (volume decline was 10% in FY2015).
• The quantum of increase in excise duty hike on cigarettes has reduced from mid-teens to low double digits. We expect
the sales volume of cigarette to stabilize in the coming quarters. However, increase in the value added tax in
respective state budgets would be keenly monitored in the coming months. ITC’s stock price has corrected prior to the
announcement of the Union Budget and the current valuations of 18.1x its FY2018E earnings are at a discount to
some of the large-cap FMCG stocks. We maintain our Buy recommendation on the stock.

“ SECTORAL ANALYSIS - AUTO”

“ SECTORAL ANALYSIS - BANKS ”

“ SECTORAL ANALYSIS –
CEMENT & CAPITAL GOODS”

CONSUMER GOODS”

LOGISTICS AND OIL & GAS”

Union Budget 2016

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