Industry mostly feels hard done by, but budget not that bad

MUMBAI: For the superstitious the portents were certainly not good. On a day when finance minister Jaswant Singh delivered the Union Budget 2003-2004, the capital woke up to rains and a chill in the air. Something unusual for this time of year. What was not so unexpected though, considering it is election year, was the "populist budget" Singh presented in Parliament today. Populist for industry and the middle classes that is.

While industry in general has given a thumbs up to Singh's first budget effort, the media and entertainment industry was singing quite a different tune. And some of the superstitious in the industry (of which there are many) would certainly have felt that the weather gods were reflecting their mood.

With a few notable exceptions, the general sentiment seems to be, "Why were we left out of the party."

So what stood out. One was the fact that there was no mention at all of the media and entertainment sector. Service tax has been increased from 5 per cent to 8 per cent. And there was no direct reference to the issue that is exercising everyone in the face of the imminent role out of conditional access systems (CAS) in the country, the duty on the import of set top boxes.

Still cutting through all the negative noises around the budget, it might not be such a bad deal after all, is what believes is the case. A rating of 6/10 seems a fair call.

Reliance Entertainment chairman Amit Khanna puts some perspective on the issue of increase in the service tax when he says: "In the last budget itself the finance minister had clearly said that service tax would be increased this time round so it was an unrealistic expectation that this tax would be reduced."

But the more common response has been the one given by the head of a media company, who on on condition of anonymity, said: "It is quite disappointing that we as an industry have got lost amidst sectors like infrastructure, health and what have you," adding, "At least the duties on various equipment meant for broadcasting could have been rationalised or brought at par with the IT sector that has, again, got huge sops. All this, at a time when the I&B minister (Ravi Shankar Prasad) has declared that he would like to push the media and entertainment industry." Prasad had in fact said soon after taking office that this would be the decade of the media and entertainment industry.

A senior executive of Siti Cable pointed out that the hike in the service tax has come as "quite a blow." Though Siti Cable as an MSO doesn't pay a service tax on the cable service as it is the cable operators who are taxed, an MSO has to pay service tax on the ads that are carried on their video channel.

TV18 MD Raghav Bahl who spent most of the morning and afternoon questioning people on the budget on the business and finance channel CNBC India did admit to that the "media industry seems to have got a bit isolated". "Any move on the STB front (rationalisation or cut in duties on components) would have been pro-consumer. No mention must be a disappointment for the CAS stakeholders," he said.

So what are the positives. Well, a lot of it is indirect but some of it is direct.

The 5 per cent "war surcharge" on corporate tax has been reduced to 2.5 per cent. This means that for foreign companies like Star India, which currently pays a 40 per cent corporate tax plus 2 per cent factored in for the surcharge (total payout of 42 per cent) will now pay 41 per cent. For Indian companies, which pay 35 per cent corporate tax, the total payout will now be around 35.9 per cent.

Even on the issue of service tax, the FM has said that there will be introduction of service tax and value added tax from 1 April. He has also said that there will be additional excise duty reforms to implement VAT. Now if what Zee Group chairman Subhash Chandra believes will happen around VAT is proved true, then there may be no need to crib so much anyways. According to Chandra: "Though service tax has been increased to 8 per cent from 5 per cent, since it is going to be covered under VAT, it would result in substantial savings to companies like us." VAT will gradually replace sales tax, Chandra feels.

The information available with indicates that the service tax will be "modvatable", which means that whatever has been previously charged by way of surcharge can be carried forward in any further transactions. This in fact may well work out to being a boon rather than a bane.

The benefits to domestic satellite companies has been extended for one year. This will benefit projects like Chandra's Essel Group's Agrani satellite plan, which is currently in the pipeline. The FM has extended the benefit for one more year till 31 March 2004, saying that it is "well understood that such projects do take a considerable time to get completed. The Agrani project is scheduled to go onstream in the fourth quarter this fiscal which means that this benefir can be availed of.

Foreign direct investment (FDI), external commercial borrowings (ECB) changes will help corporate sectors. This will help Indian companies which have a presence in other parts of the world.

There is excise exemption in prerecorded audio CDs. This will help audio companies to boost their sales by competing with unorganised small companies. In turn, advertisements to TV music channels may increase from music companies.

Capital equipment customs duty in Telecom and IT is down from 25 to 15 per cent. IT companies to continue enjoying Sec 10A and 10B tax sops under the Income Tax Act. The sops have been extended to include mergers and acquisitions which was not there earlier. This means providing incentives for mergers and acquisitions.

There has been some heat over the issue of the duties on set top boxes not being reduced to the 10 per cent that that the industry has been seeking. The industry was expecting that the duty would fall from the current 29 per cent (customs duty plus CVD of roughly 4 per cent) There has been a reduction in customs duty across the board though and while a reading of the fine print will ascertain just how much of a benefit it will provide, looking at the benefits given to the IT and telecom sector, it is likely that the cost of set top boxes will come down. Still the fact remains that considering just how crucial to the whole CAS process the STB is, a significant duty reduction was more than warranted.

The assessable value of the imported cinematographic films exposed and developed of heading 37.06 for determination of customs duty will include only the cost of the print and the freight and insurance. Film exporters had a specific grouse that they were being charged on royalties as well. This is one anomaly that has been removed, Amit Khanna says.

A move which will help in the upgrading of cable systems is that customs duty on optical fibre cable has been brought down from 25 per cent to 20 per cent. Import duty on raw materials for the manufacture of optical fibre has been brought down from 30 per cent to 15 per cent. It will not help just OFC manufactureres but more importantly companies like Reliance Infocomm which are heavily into setting up broadband networks.

And looking at the overall impact of this budget, it is expected to lay the framework and provide the impetus that increases the spending power of middle class throufgh savings in direct taxes and other reliefs. Part of such spending would go towards the entertainment industry.

So the verdict has to be that while more could have been done, it has to be accepted that the FM was looking at a broad canvas picture. And for that he cannot really be faulted.

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