Transportation costs of petrochemicals may go up

Budget provision

The following changes in the duties have been proposed in the Union budget 2009-10:

• Excise duty on naphtha to be reduced to 14%.
• Excise duty on PTA and DMT to be increased from 4% to 8%.
• Excise duty on acrylonitrile to be increased from 4% to 8%.
• Excise duty on paraxylene to be maintained at 4%
• Minimum Alternate Tax (MAT) to be increased to 15% of book profits from 10%. The period allowed to carry forward the tax credit under MAT to be extended from seven years to ten years
• Service Tax to be imposed on the following services: Service provided in relation to transport of goods by rail; Service provided in relation to transport of coastal cargo; and goods through inland water including National Waterways
• The Assam Gas Cracker Project sanctioned in April 2006 is being executed at a cost of Rs.5,461 crore.  The capital subsidy of Rs.2,138 crore for the project is to be provided by the Central Government.  The outlay for this project is being stepped up suitably.
• Fringe Benefit Tax (FBT) on the value of certain fringe benefits provided by employers to their employees to be abolished.
• Introduction of the Goods and Services Tax (GST) with effect from 1st April, 2010

Industry expectations

• Import duty on polymers, chemicals and fibre intermediates should be rationalized and increased to 10% from current 5%.
• Customs duty on capital goods imported by Petrochemicals industry be made 'nil' and the customs duty on catalysts imported for use in manufacture of petrochemicals (like EDC, VCM and Styrene) be made 'nil'.
• Reduction in excise duty

Budget impact

Petrochemical industry is already hit by high volatility in crude prices. Union Budget 2009-10 however provides no major announcement to help the sector.

The levy of service tax on transport of goods through railways and through coastal cargo, inland water including national waterways can lead to hike in transportation costs of the petrochemicals;  this will be in addition to incremental road transport cost due to hike in petrol and diesel prices.

The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector.  On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.

Also, the hike in MAT will not be earnings dilative but will only be cash flow dilative.  The increase in liability towards MAT will be matched by an incremental deferred tax credit.  Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.

But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them. So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilative but cash flow dilative. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Stocks to watch

Finolex Industries, DCW, Bombay Dyeing

Outlook

Union budget provides no major fillip to the ailing sector. Petrochemical industry in recent times has been hit hardly by the volatility in crude prices and demand destruction worldwide due to global recession. Indian petrochemical industry too performed meekly.

The levy of service tax on transport of goods through railways and through coastal cargo, inland water including national waterways can lead to hike in transportation costs of the petrochemicals. This will be in addition to incremental road transport cost due to hike in petrol and diesel prices.

Globally import duty on polymer ranges from 6.5% (Europe and USA) to as high as 30% in Malaysia. In Saudi Arabia it is at 12.5% where feedstock cost is almost one-sixth in India.