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FMCG: Budget 2013-14 Analysis
Outlook: Negative
Budget Provisions
Companies investing Rs 100 crore or more in plant and machinery during the period FY14 and FY15 will be entitled to deduct an investment allowance of 15% of the investment.
Increase surcharge from 5% to 10% on domestic companies whose taxable income exceed Rs 10 crore. In case of foreign companies who pay a higher rate of corporate tax, surcharge to increase from 2% to 5%, if the taxable income exceeds Rs 10 crore.
Current surcharge increased from 5% to 10% on dividend distribution tax or tax on distributed income.
Concessional rate of tax of 15% on dividend received by an Indian company from its foreign subsidiary proposed to continue for one more year.
Removal of cascading effect of DDT in a multi-tier structure where dividend received by a domestic company from its subsidiary (which is also a domestic company) is distributed to its shareholders.
Work on draft GST Constitutional amendment bill and GST law expected to be taken forward. sum of Rs 9,000 crore is set apart in the budget towards the first installment of the balance of CST compensation
No change in the normal rates of 12% for excise duty and service tax. No change in the peak rate of basic customs duty of 10% for non-agricultural products. Education cess to continue at 3%
No revise either the slabs or the rates of Personal Income Tax. However, relief for Tax Payers in the first bracket of Rs 2 lakh to Rs 5 lakh. A tax credit of Rs 2000 to every person with total income upto Rs 5 lakh. Surcharge of 10% percent on persons (other than companies) whose taxable income exceed Rs 1 crore to augment revenues.
Allocation of Rs 80194 crore in 2013-14 for Ministry of Rural Development marking an increase of 46%.
The tax rate in case of non-resident taxpayer, in respect of income by way of royalty and fees for technical services as provided under section 115A, is proposed to be increased from 10% to 25%. This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.
Custom Duty on specified machinery for manufacture of leather and leather goods including footwear reduced from 7.5% to 5%.
Excise duty on cigarettes is being increased by about 18% on all cigarettes except cigarettes of length not exceeding 65 mm. Cigars and cigarillos duty is also being similarly raised.
Basic customs duty on hazel nuts is being reduced from 30% to 10%.
Basic customs duty on dehulled oat grain is being reduced from 30% to 15%.
Export duty of 10% on de-oiled rice bran oil cake is being withdrawn
Industry Expectations
No hike in excise duty hike on FMCG products
The rate of central excise duty on the 65 mm filter cigarette slab be reduced from the existing level of Rs 689 per thousand cigarettes to Rs 200 per thousand cigarettes.
The rates of central excise duty for the other slabs of filter cigarette be reduced, or, at the very least, no further increases in duty for these slabs.
A hike in Gold import duty
Existing exemptions being granted to Food Processing Industry (either in the form of Nil rate of duty / 2% rate of duty) should be continued and no new levy introduced in the forthcoming Union Budget on Food Processing industry
Expects to provide some relief by reducing excise duty on Packaging materials used in the food industry - Printed Laminates, Pet Jars, Corrugated Cartons - from 12% to 6%.
Increase in allocation of resources towards NREGA and Bharat Nirman
Concrete announcement regarding roll-out of GST
Rural focus of the budget and direct tax relief for the middle class
Budget Impact
Budget imposed excise duty on cigarettes is being increased by about 18% on all cigarettes. Last year there was 21% excise duty hike in cigarette. ITC is expected to pass on this entire 18% hike to consumer.
The MNC company’s subsidiaries which pay royalty and fees for technical services to their parents companies outside India will have to 25% tax on it.
A 46% rise in allocation for Ministry of Rural Development augment well for FMCG companies, as rural region contributes around 25% to 50% of total revenue to FMCG companies.
Stock to watch
ITC, Marico, Nestle, GSK Consumer, Colgate Palmolive, HUL
Outlook
The budget was negative for the FMCG sector. There was no major announcement for the sector. There was no rise in income tax slab this time which was very essential looking at less discretionary income in hand of consumer and fall in volume of FMCG companies.
However, rise in allocation for Ministry of Rural Development augment well for FMCG companies. The budget is a negative development for the cigarette industry particularly for ITC considering that after last year’s 21% excise duty, this year also there was 18% rise. ITC is left with no choice except to pass on the hike to consumer. Volume are expected to see dip initially, before recovering.
