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March 1, 2001 - March 1, 2001

Boost to capital market reforms gets positive response Thursday, March 1, 2001

The markets reacted positively to the Budget proposals, with the Sensex closing at 4277.04 points up 177.36 points over Tuesday's closing figures. Finance Minister Yashwant Sinha said in his Budget speech that the financial sector and capital market reforms would continue and proposed a number of initiatives in this regard.

Among the initiatives is the proposal to raise the foreign investment limit in a company under the portfolio investment route by Foreign Institutional Investors to 49 per cent from 40 per cent.

Sinha said provided that foreign investors bring in a minimum of $50 million, Foreign Direct Investment (FDI) in non-banking financial companies would not have to be accompanied with a divestment of a minimum of 25 per cent of their holding in the domestic market.

Turning to capital account liberalisation, he said Indian companies may now invest abroad up to $50 million annually through the automatic route without three-year profitability condition under the account.

He said companies which have issued ADRs/GDRs may henceforth make foreign investments up to 100 per cent of these proceeds, up from the current ceiling of 50 per cent.

Besides, he said Indian companies that have issued ADRs/GDRs, may acquire shares of foreign companies up to an amount of $100 million or an amount equivalent to ten times of their exports, whichever is higher.

Sinha said Indian companies would be permitted to list in foreign stock exchanges by sponsoring ADR/GDR issues against block shareholding. This facility would have to be offered to all categories of shareholders.

Turning to debt market, Sinha said a clearing corporation for further orderly development of money market, government securities market and settlement of forex transactions will be set up.

Stating that the Public Debt Act would be replaced by a Government Securities Act, he said the RBI would set up an electronic negotiated dealing system by June this year to facilitate transparent electronic bidding in auctions and dealings in government securities on a real time basis.

The finance minister said RBI would set up electronic fund transfer (EFT) and real time gross settlement systems (RTGS) within the next year.

He said there would be removal of taxation anomalies to promote issuance of strips, zero coupon bonds, deep discount bonds and the like.

On banking sector, he said seven more debt recovery tribunals would be set up during 2001-02 and legislation to facilitate foreclosure and enforcement of securities in cases of default would be introduced.

Besides, he said the banking service recruitment boards would be abolished by July 31 this year or earlier. Banks to do all future recruitment themselves, he added.

Markets happy with the Budget

"It's a great Budget," commented Bajaj Auto chairman Rahul Bajaj. Bajaj is not the only one who is cheering finance minister Yashwant Sinha on Wednesday afternoon. The stock market, which reflects the mood of the nation, was also in a jubilant mood.

The Sensex at 1.30 pm was at 4,248, a good rally from its overnight close of 4,069. There is a freeze on many of the key stocks as these scrips have already hit the 8 per cent limit. Sectors which are witnessing a bull run include FMCG, software and Old Economy.

Among infotech stocks, Himachal Futuristics, Global Telesystems, Infosys, SSI, Aptech, and NIIT are among the major gainers. In FMCG, stocks like HLL and Nestle have exhausted their 8 per cent limit. Old Economy stocks like Grasim, L&T and Telco are also up sharply.

The market is particularly happy with the government decision to reduce dividend tax. Ajit Sanghvi of Malini Sanghvi Securities said that the reduction in dividend tax from 20 per cent to 10 per cent has improved the overall sentiment.

Stockbrokers were praying for a scrapping of the dividend tax, but they are happy with this reduction. In his last Budget speech, Yashwant Sinha had announced an increment of dividend tax from 10 to 20 per cent.

The reduction in dividend tax will have a strong bearing on market sentiments, and a buoyant stockmarket is critical for India -- especially since the government wants to offload its stake in already listed PSUs, said a senior stockbroker.

"The government would be suitably compensated for the loss in revenues. The gain in the market capitalisation of PSU stocks alone would be much more than the loss in revenue. The government's efforts in divesting its stake in PSUs and raising funds would derive benefits out of this exercise," Sanghvi added.

Concessions for software services also made the markets happy. Some of the announcements which are seen to be helping the software industry include Indian companies can now claim exports concessions for their on site services. The decision to increase the investment limit of foreign institutional investors in companies to 49 per cent from 40 per cent will also help out these companies.

The decision to allow companies to use up to 100 per cent of ADR proceeds for investments abroad, and allowing companies to invest up to $50 million abroad without applying the three-year profits rule have all made the stockmarkets happy.

Tax holidays for infrastructure projects and the decision to exempt capital gains tax for new issues were welcomed. The reduction in customs duty on IT and telecom equipment, and downsizing of government machinery have also been welcomed by the market.

Observers however said that the government is likely to come under pressure from the opposition over some of its announcements on excise duty reduction and labour law reforms. The decision is reduce the small savings rate has also been criticised

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Cars, CNG kits will be cheaper Thursday, March 1, 2001

Cars and two-wheelers will be cheaper with Finance Minister Yashwant Sinha announcing a reduction of excise duty on passenger cars to 32 per cent from 40 per cent and on two-wheelers with engine capacity over 75 cc to 16 per cent from 24 per cent.

CNG kits and parts will now attract a low duty of five per cent. The same is extended to LPG conversion kits and their parts. Since LNG is not produced in India, the CVD on import of LNG is being exempted. Excise duty on diesel, which was reduced to 12 per cent, has now been restored to 16 per cent Cenvat.

Sinha also said he had increased customs duties on second-hand car imports to 105 per cent from 35 per cent to protect the domestic auto industry. India will lift quantitative import restrictions on 700 items, including passenger cars, in April as a result of World Trade Organisation pact.

India's automobile industry had sought the tax cuts to boost car sales which had fallen 6.27 per cent in the first 10 months of 2000-01 from the same period a year earlier. Taxes currently account for over 50 percent of the cost of a new car in India.

The customs duty on information technology and telecom products and their inputs and components has been reduced to 15 per cent from March 1, 2001.

The customs duty on cut and polished colour gem stones has been brought down to 15 per cent to help enhance export of these items.

Customs duty on cements and clinkers has been reduced to 25 per cent to help the customers.

Journalists can now import cameras, computers and fax machines upto a value of Rs 1,00,000 for personal use duty free once in two years instead of five years.

The duty on cinematographic cameras, projectors and related equipment used by the film industry has been reduced to 15 from 25 per cent.

In order to curb gold smuggling, the duty on gold has been reduced to Rs 250 for 10 grams from Rs 400.

A special surcharge of excise duty of 15 per cent on cigarettes has been proposed. Goggles, mattresses, imitation jewellery and rubberised mattress will attract four per cent duty each.

The finance minister has also proposed 16 per cent excise duty on branded garments. He has also proposed increase in import duty on tea, coffee, copra raised from 35 to 70 per cent. On crude edible oils, it will be 55 per cent.

CVD will be levied at a suitable rate on import of foreign liquor, he said.

Sinha has proposed to remove all income tax surcharge on corporate and non-corporates except the two per cent surcharge for the Gujarat Earthquake Fund. Income between Rs 40,000 and Rs 1 lakh will get 30 per cent exemption under Section 88 instead of 20 per cent now.

Tax will be computed on the total income of the employee based on the cost to the company, excepting on cars and house rent. Tax payable on distribution of dividends of domestic companies and UTI will be increased from 10 per cent to 20 per cent.

Tax deduction limit on interests on housing loans on self-occupied property will be raised from Rs 1 lakh to Rs 1.5 lakh.

Cigarettes and chewing tobacco will attract a special surcharge of 15 per cent, the finance minister proposed.

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The Budget and the Stock Market Thursday, March 1, 2001

The Budget holds many
positives for the stock market which could provide short term triggers.

The major announcements

  • The drastic cut in small savings
    rate by 150 bps will reduce the attractiveness of public/ bank deposits and
    hence, help channel money into equities.

  • Cut in dividend tax rate from
    20% to 10% will help companies, especially with high dividend payouts.

  • Hike in FII investment ceiling
    from 40% to 49% could trigger fresh buying in FII fancied stocks like
    Infosys and HDFC. Moreover, it would improve India’s weight in the widely
    followed MSCI Emerging Markets Index, thereby channeling fresh investments.

  • Removal of surcharge on
    corporate tax would boost corporate bottomlines, especially high tax paying

  • Primary market to get a boost as
    long term capital gains will not be applicable to amounts invested in IPOs

Sectoral Impact

The biggest beneficiary sectors will
be Consumer ( reduction of excise on food items and increase of import
duties) and Autos (reduction of excise duty on two and four wheelers;
accelerated depreciation for commercial vehicles). Banks will enjoy the
benefit of interest rate cut. Pharmaceuticals, fertilizers and sugar will
benefit from proposed price decontrol. Software sector will also benefit
from changes in rules regarding foreign investments and tax incentives for
Technology parks. Cement will have a mild negative impact as import
duties have been reduced. There were expectations built in power sector
which have been belied.

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Dividend stripping …gone Thursday, March 1, 2001

Budget has indeed taken steps to curb investors from taking advantage of dividend stripping by investing in mutual funds for the short term.
The budget has indeed taken steps to curb investors from taking advantage of dividend stripping by investing in mutual funds for the short term. This was possible under Sec 94. But realizing that this results in "unintended benefit flows to the taxpayer", the government intends to introduce a new Sub-section (7) in the above section. "If a person buys or acquires securities or unit within a period of three months prior to the record date fixed for declaration of dividend or distribution of income and sells or transfers the same within a period of three months after such record date, and the dividend or income received or receivable is exempt, then, the loss, if any, arising from such purchase or sale shall be ignored to the extent such loss does not exceed the amount of such dividend or income, in the computation of the income, chargeable to tax, of such person". The finance ministry was expected to plug this loophole and they have done it.

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How a rupee is earned and spent Thursday, March 1, 2001

NEW DELHI, Feb 28 (Narad Online): The Union government earns major part of every rupee through borrowings and spends biggest portion of every rupee towards interest payment.

27 paise of every rupee earned come from Borrowings whereas Excise brings 19 paise, Customs 12 paise and Non-tax Revenue 16 paise, according to the Union Budget for 2001-02 which the Union Finance Minister presented in Parliament today.

On the other hand, Interest Payments account for 26 paise of every rupee spent followed by expenditure on Defence at 14 paise, Central Plan at 14 paise and States' share of taxes and duties again at 14 paise of every rupee spent.

State's share of taxes, duties and assistance provided to them together account for 23 per cent of the government's expenditure, with nine paise of every rupee earned going into State and Union Territory Plan Assistance.

While corporate tax accounted for 10 paise of every rupee earned this fiscal, income tax collections accounted for nine per cent of the country's earnings in 2001-02.

The government spent up to 12 per cent of its revenue generated on `other non-plan expenditure' in 2000-01 whereas non-plan assistance to states and Union Territories accounted for four paise of every rupee spent during the year.

The subsidy bill accounts for only seven paise of every rupee earned, according to the Union Budget for 2001-02.

On the earnings side, the government mopped up a mere one paisa for every rupee earned under the head of other taxes while non-debt capital receipts accounted for six paise of every rupee earned during the fiscal under review.

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