Paper: Excise duty paper labels up 8%

Excise duty on folders, file covers, manifold business forms & other articles of stationery, of paper or paperboard except notebooks and exercise books is being increased from 4% to 8%.

• Excise duty on paper and paperboard labels is being increased from 4% to 8%.
• Excise duty rate on certain varieties of paper, paperboard and articles which currently attracting 4% will not be change.
• Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees to be abolished.

Industry expectation

The industry were having lots of expectation from the today's budget like imposition of 20% safeguard duty on select varieties of paper, lower rate of basic custom duty on import of wood pulp, waste paper and coal, depreciation rate to be restored to the earlier rate of 25%, etc.

Out of it, very important was the increase in basic custom duty from 10% to 15% on paper/paperboards along with re-introduce component of special additional duty to save the domestic manufacturer.

The paper and paperboard manufacturers are venturing into value added products.  But this venture was hindered by lower excise duty on folders, file covers, manifold business forms & other articles of stationery, of paper or paperboard except notebooks and exercise books and on paper and paperboard labels. 

These were earlier attracting excise duty at 4%, which is now enhanced to 8%.  This should help improve the share of organized players in these niche products.

Budget Impact

The budget turned out to be disappointment of the paper industry. The finance minister fulfilled none of its wish list. The industry will not see any huge impact from the increase in excise duty on stationary products and paper and paperboard labels to 8%.

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 a 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.

Stock to watch

Ballarpur Industries (BILT), JK Paper, Tamil Nadu Newsprint & Papers (TNPL)

Outlook

With demand turning sluggish, and as the competition for the shrinking pie is intensifying with surge in imports, the domestic paper industry is finding it difficult to increase prices. The landed cost of imports is lower than the domestic prices, which are forcing the domestic players to cut prices.

However with no change in custom duty and no excise duty, the industry will see impact on the top line and bottom line due to slow down in economy (as paper industry growth is in tandem with GDP growth) and cheap import from China, Indonesia, Finland, Sweden, Germany and the United States. 

Also, the industry is in the midst of massive capacity expansions, which if come on stream, can only aggravate the situation, unless the domestic consumption improves, or if the players find suitable export market for surpluses, both of which looks difficult in the current market and economic conditions.