Cementing growth for infrastructure

KPMG | Updated on March 11, 2013


Finance Minister P. Chidambaram has acknowledged the need for large volumes of investment for infrastructure and provided much-needed policy measures to mobilise it — namely, raising funds through ‘infrastructure debt funds’, credit enhancement by India Infrastructure Finance Corporation, additional issue of tax-free bonds and so on.

Specifically for the energy and natural resources sector, he has proposed extending the tax holiday for the power sector by another year; new contracting mechanism, and policy proposals for oil and gas exploration, including natural gas pricing, pooled pricing mechanism for coal and PPP (public-private-partnership) model for coal production; low-cost financing for renewable energy projects; generation-based incentive for wind energy and so on.

On indirect tax, he has taken a stable approach with the retention of current peak rate customs duty, excise duty and service tax, which comes as a relief to the sector.

The measures will help attract investments and boost production of coal, oil, natural gas and power.

Poor signal for telecom sector

As one of the key growth drivers of the Indian economy, the telecom sector had several expectations from Union Budget 2013-14 — primarily centred on an infrastructure status and a rational tax environment. Most expectations, however, remain unfulfilled.

To begin with, tax on royalty/ fee for technical services (FTS) was raised from 10.51 per cent to 25 per cent. Given that the existing rate was felt burdensome, the proposed 25 per cent is likely to adversely impact both Indian and multinational telcos with operations in India.

Also, a large section of the industry expected the Finance Minister to bring mobile devices under the special provisions section of Central Sales Tax to help reduce prices by 7-8 per cent, thereby leading to proliferation of devices in untapped markets. On the contrary, excise duty on devices priced above Rs 2,000 has been hiked to 6 per cent. This is expected to increase the price of devices, specifically in the smartphone segment.

In addition, the telecom sector was not assigned infrastructure status this year. Given the capital-intensive nature of the industry, it was anticipated that tax holiday under section 80I(A), currently applicable to tower businesses, would be extended to all telecom players, including Internet service companies.

Other expectations that have been sidelined include right of way for rolling out fibre broadband infrastructure, availability of input credits, improved allocation of Universal Service Obligation (USO) funds, reduced custom duty for imported telecom equipment, and easing of merger and acquisition guidelines.

However, on a positive note, the Government has proposed to provide appropriate incentives for semiconductor wafer fab manufacturing facilities, including zero customs duty for plant and machinery. This is likely to spur device manufacturers to set up shop in India.

Wider coverage for insurance sector

There are some commendable steps taken to increase insurance penetration.

Each town with a population of at least 10,000 is mandated to have by FY2014 a Life Insurance Corporation office and an office of at least one public sector general insurance company.

Insurance companies can open branches in tier-II cities without prior approval from the Insurance Regulatory and Development Authority.

Additional allocation of Rs 100 crore to the microfinance development fund will help revive the microfinance sector, which has witnessed a sharp decline during the last couple of years.

In terms of insurance penetration and inclusiveness, it is a good move for the sector. However, it may dent profitability in the near term. The sector is cash-strapped, and one can only hope that the Insurance and Pension Bill will be passed by Parliament soon. Insurance companies will also benefit from the decision to treat banks’ KYC (know your customer) norms as sufficient to issue insurance policies and to use banking correspondents to sell micro-insurance.

Published on March 11, 2013

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