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To implement the conditional access system (CAS) legislation, it
would be necessary to import STBs, states the report.
According to industry sources, the ministry of information and broadcasting
has recommended 10 per cent customs duty and five per cent excise
levy for all components of the CAS system for a period of two years.
As STBs are not made in India, the report expects the finance minister
to lower the customs levy only on STBs to 10 per cent (down 60 per
cent) but not on all the CAS components. This is because, should
the levies be reduced on all components of the CAS equipment as
proposed by the ministry of I&B, industry might end up importing
standard headend equipment (such as modulators and amplifiers) currently
made in India as well. This could impact domestic industry adversely.
The report expects the FM to levy eight per cent excise levy (down
from 16 per cent), as the five per cent rate slab for excise levy
does not exist.
Duty structure on STBs
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Duties
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Import
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Excise
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|
|
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Existing
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Merrill Lynch esimates
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Existing
|
Merrill Lynch estimates
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Finished goods/STBs
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25 + 4 per cent
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10+ 4 percent
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16 per cent
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8 per cent
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Impact and recommendations of the Merrill Lynch report:
The report says that the cut in duties would be the key to success
of the CAS rollout. Price of the STB will be a key determinant of
STB penetration. The price of STBs will depend on the rate of the
customs duty, as there is no facility available domestically to
manufacture STBs.
Given the current incidence of over 50 per cent tax on STBs, significant
reduction in duties would make STBs far more affordable. Further,
the duty structure would also influence capex requirements of cable
operators and cost to consumers.
o Cut in duties could also influence selection of CAS technology.
Digital STBs which are prohibitively expensive (Rs7K) at the current
duty rate, might become more affordable (Rs4-5K) with duty reduction.
Removal of the 5 per cent surcharge in corporate tax rates. This
would benefit both media companies as they pay tax at a high rate
- Zee Tele (29 per cent) and Balaji Tele (>35 per cent).
Removal of tax on dividends may benefit Balaji's stock. Balaji
with its large free cash, may be tempted to increase the payout.
Also Balaji currently offers 4.2 per cent yield, which would be
attractive in the zero dividend tax scenario.
Impact on Zee Telefilms:
The report has allotted its overweight rating to the Zee Telefilms
scrip at a price level of around Rs 89.3.
The report states that it expects the peak custom duties to be
reduced by five per cent. In excise, it expects rationalization
of slabs with the reduction in excise duties in some products being
accompanied by an increase in others.
The report also expects the government to reiterate its commitment
to VAT. Overall, indirect tax changes will be marginally negative
for corporate profitability.
The sensitivity analysis for removal of various tax deductions
shows the following:
|
|
|
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Additions to tax if
deductions are removed
|
|
|
|
|
|
Backward area
|
Intra
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Aligning of book and
IT dept
|
|
Exports
|
|
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Effective tax rate
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Rs (mln)
|
EPS change
|
Rs (mln)
|
EPS change
|
Rs (mln)
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EPS change
|
|
28.5 per cent
|
0
|
0
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35
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1.2 per cent
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23
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0.8 per cent
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Effect of removal of surcharge on corporate tax:
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Price as of 21 February
2003
|
PBTFY04
|
TaxFY04
|
Effective tax rate
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Tax saving
|
EPS gain
|
|
85.80
|
4054.4
|
1155.5
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28.5 per cent
|
55
|
1.9 per cent
|
Based on the 21 February 2003 price of Rs 85.80, the report states
that the dividend yield would be around 0.70 and the dividend payout
would be 12.7 per cent.
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