Steel: Sidelined by Budget

The levy of service tax for transport of goods by rail, transport of cargo, goods through inland water including national waterways will hike the transport cost.

Budget Provision

Direct Taxes

• No changes made in the Corporate Tax rates.
• Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their employees to be abolished.
• 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

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

Industry Expectation

• As per sources, the industry was pushing for a 15% import duty on certain steel products so as to keep a check on dumping from countries like China and Ukraine. The import duty applicable is 5%, which the industry finds insufficient. Furthermore there was an expectation of a hike in export tax on iron ore. At present, there is no export duty on iron ore fines while shipments of iron ore lumps carry a levy of 5%.

Budget Impact

• There was expectation of an increase in import duty on certain steel and steel products and also an expectation of a hike in export tax on iron ore. None of the two demand of was met with.
• Focus on Infrastructure is expected to provide indirect demand push.
• The imposition of service tax is expected to lead increase in costs structure,

The transport cost of the steel sector is set to rise, firstly due to rise in petrol and diesel prices.  Now, the Union budget 2009-10 has levied service charges on transport of goods by rail, by coastal cargo, through inland water including national highways.  This will lead to rise in transport cost, especially on iron ore, coal and steel, and add to the industry's burden.

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.

Companies to watch out for

Tata Steel, JSPL and JSW Steel

Outlook

None of the 2 major industry expectations are met with. However focus on Infrastructure is expected to provide indirect demand push.

Over a medium term perspective the government plans to increase the investment in infrastructure to more than 9% of GDP by 2014. Overall with Industry demands not met the Budget.

But the potential rise in transport costs is it for coal, or iron ore, or steel, will be an added burden for the steel sector.  Hence, the Union Budget is neutral with a negative bias for the steel sector.