TAXING times

Taxes: what's in it for you

Finance Minister P Chidambaram has kept both individuals and corporates happy by keeping the tax rates intact and not introducing any new direct tax. He has indirectly hit both the categories by raising the services tax rate to 12 per cent from 10 per cent. So now, you would need to pay a little more if you dine out or buy some luxury good. More services are to be brought under the tax net. If you are a stockmarket investor, you would need to pay a little more as the securities transaction tax (STT) has been raised by 25 per cent. The cash transaction tax has also been retained. However, he has introduced some sops for certain category of people by abolishing the one-by-six scheme under the Income Tax Act for filing returns.
Chidambaram has proposed to include investments in fixed deposits in scheduled banks for a term of not less than five years in Section 80C of the Income Tax Act, thus responding to the demand for tax exemption on FDs of certain tenure. He has also proposed to remove the limit of Rs 10,000 in respect of contribution to certain pension funds in Section 80CC, subject to the overall ceiling of Rs 1 lakh. The Finance Minister has also proposed to remove the exemption under Section 10(23G), which he said, was not relevant when interest rates are moderate. Chidambaram's decision to keep the personal and corporate taxes intact may also have stemmmed from a healthier fiscal situation thann anticipated. The Government sees its revenue deficit for 2005-06 at 2.1 per cent of GDP compared to budgeted 2.6 per cent. The Finance Minister hopes to raise an additional Rs 6000 crore from the tax proposals.
Industry captains lauded the Finance Minister for measures to bring in fiscal discipline and cut deficit but had a mixed view on new tax proposals burdening the capital market. "The industry will be happy as there are no major negatives. It has cut down customs duty and has covered lot of industries as well," CII chief mentor Tarun Das said. JM Morgan Stanley chairman Nimesh Kampani termed the budget as a good development on fiscal side. "I think the Minister has done a great job in fiscal deficit, which will be 3.8 per cent of GDP in 2006-07," he said. Kotak Mahindra Bank vice-chairman Uday Kotak also welcomed the budget saying it was a positive budget at micro-level and was good for long term investors.
However, Ruchir Sharma of Morgan Stanley said it was an "innocuous budget" and there were no policy initiatives to take the market to higher levels. "The market hoped much more than reforms... even the Prime Minister had talked about out of the box thinking," he regretted.

FBT Implications

Agreeing to the persistent demand from industry chambers, the government on Tuesday watered down the Fringe Benefit Tax provisions, introduced last year, a move that will help employers give better perks and facilities including superannuation schemes and tour and travel to employees with less tax burden.
Announcing the changes in the Budget proposals, Finance Minister P Chidambaram doubled the limit to Rs two lakh contributed by an employer to an approved superannuation fund for tax exemption.
Tour and travel expenses will now attract just five per cent as FBT instead of 20 per cent levied last year.
In case of airline companies and shipping industry offering hospitality and hotel boarding and lodging facilities will have to pay five per cent as FBT compared to 20 per cent levied earlier.
Free samples of medicines, medical equipment distributed to doctors and expenses incurred on brand ambassadors and celebity endorsement have been excluded from the ambit of FBT.

RCVL: A different tune & Steel sector

RCVL

Bharti enjoys a higher operating profit margin compared with RCVL
Reliance Communications Ventures (RCVL) has posted revenues of Rs 3,327 crore in the December 2005 quarter, a growth of 19 per cent over the September quarter.

At Rs 3025 crore, Bharti Tele’s numbers are not too different, though the growth was lower at 11.6 per cent q-o-q.

In the absence of detailed numbers, it is not known how much of RCVL’s top line comes from sales of handsets.

However, the operating profit for Bharti at Rs 1,116 crore is higher than RCVL’s 848 crore. So, currently, Bharti Tele certainly enjoys a higher operating profit margin at 37 per cent compared with RCVL’s 25.48 per cent.

Also in Bharti’s case, approximately 65 per cent of revenues accrue from mobile telephony. For RCVL, the proportion may be slightly lower, given the presence of Flag Telecom, but that is an assumption.

As of January end, RCVL had around 18.3 million subscribers, of which 15.5 million are mobile phone customers. Bharti Tele’s customer base isn’t too different with around 18.94 million subscribers, of which 17.7 million are mobile phone customers.

Thus, the average revenue per user (ARPU), which was Rs 470 for Bharti in the December quarter should not be very much lower for RCVL. RCVL is believed to be increasing its share of pre-paid users.

Since RCVL does not fully own Reliance Infocomm, Reliance Telecom and Reliance Communication Infrastructure, a portion of the profits would go to other shareholders. Bharti’s market capitalisation is approximately Rs 69,394 crore.

Analysts believe that though both companies are similar in size, RCVL today would command a lower market capitalisation given that its margins are lower.

The capex plans of both are likely to be similar—in the region of Rs 4,500-5,000 crore a year though there are industry watchers, who say that operating costs for CDMA are lower owing to the nature of the technology.

Looking ahead, RCVL’ margins should stabilise at around 30 per cent, as it scales up its network and grows other businesses such as broadband. That’s when the stock could get an even better multiple.

- Niraj Bhatt

Steel: Disciplined pricing

Is the worst over for steel companies in terms of price realisations? Prices are once again showing signs of rising, with hot rolled coil (HRC) prices going up by $15-20 a tonne over the last few weeks to about $420 a tonne, say analysts. Strong demand from American and Chinese housing markets is being seen as a trigger for the price hike.

Of equal importance, point out analysts, is the fact that large Chinese players have shown signs of returning to pricing discipline.

With international prices picking up, it does appear inevitable that domestic players could hike prices in March.

In addition, the domestic steel industry could also benefit from inputs such as met coke, which have displayed a definite downtrend in their spot prices over the past few weeks.

This improvement in operating environment helped the SAIL stock gain almost 6.5 per cent over three weeks compared with 3.45 per cent gain in the Sensex. Tata Steel, however, has gained only about 2 per cent during this period.

-Amriteshwar Mathur and Shobhana Subramanian

Latest news articles

Know your best investment options?

'Every fifth worker is adulterous'

Whats your tax-saving investments?

Two Reliance Commn firms write off Rs 4500 cr

Market Screener

Cos may not pay FBT any more

Short covering of derivatives behind 89-point rally and Low volume for the second successive day

Budget on everyone's mind

Historical evidence suggests that the market normally rallies pre-budget (4 times in the past 6 years) and falls postbudget(in each of the last 6 years). Could this time be different? We think there would be three key factors whichwould determine the post-budget direction of the market.This time the bullishness is too much to bog down the mkts there hv been many negative news but never has the mkt tanked