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Corporate India impact: Budget 2007

Corporate India gets affected in different ways in Budget 2007.

Minor Negative: Hike in Cess
Education cess is up to 3% from 2%. While this sounds like a 1% increase, the actual effect of this increase is going to be a lot lesser because cess is a tax on tax. That means income tax goes up to 33.99% from 33.66% (a change of 0.33%) and service tax goes up to 12.36% from 12.24% (increase of 0.12%). But the fact is that the education cess is going to help this very industry by bringing more educated employable people in about 10 years from now. If you don’t want to wait that long, this stays a minor negative.

Negative: Commercial rents to attract service tax
Renting commercial space is now going to cost 12.36% more. This is a negative for most industry; nearly everyone rents space. This will affect IT and BPO companies a lot more since most of their large offices are rented; and most service companies too – like Banks, telecom companies and retail.

The impact will depend on what parts of costs are taken by rents. For tech companies, which are typically people intensive, a company uses up about 80-100 sq. ft. per person – for rented space, each sq. ft. would cost around Rs. 40 per sq. ft. per month. That means the rent per person would be about Rs. 4000 per month, which translates now to a cost of about Rs. 450 per month per person. For 1000 people, that’s about 54 lakhs a year that will hit the bottom line.

Example: Going from Infy’s annual report, the lease cost for 2008 is about 38 cr., which will translate to a service tax of Rs. 4.7 cr. Wipro’s 84 cr lease spend translates to a 10 cr. liability. That is less than 1% of their profits, so it doesn’t look too bad!

Positive: Customs duties cut
All customs duties for non-agri products are down to 10% from 12% peak. This is moving to ASEAN levels of 6%. This is good for industry that imports raw material, like CD manufacturers, chemical companies etc.

Most of the other impacts are sector specific and I will talk about them in individual posts.

  • Badri says:

    >There is a real need to have a balance on the income and expenditure fronts in the Budget. Every year we seem to experiment with one or the other without any clarity or intent.

    on the repercussions of the FM’s announcement to incentivise and penalise the cement manufacturers, please check my posts

  • Deepak Shenoy says:

    >Badri: It’s a fantastic budget from teh deficit front. 3.7% budgeted deficit, fully funded plans (imagine!).

    Expenditure is bounded at a 10% increase only – which is not smart according to me, we can take a higher fiscal deficit if we had put more thrust on infrastructure.

    Cement prices: Okay, that’s a really stupid thing to do. You know what it has done, economically? It has set the lower limit of the cement prices to Rs. 190 per bag. That is exactly how markets have worked, traditionally, in open market government intervention scenarios. Ridiculous policy, I will write about it.