Analysis on Union Budget 2011-12:

Key Highlights:

 FY11 fiscal consolidation impressive

 Food inflation at 20.2% in Feb-11 – still a big concern
 GDP growth pegged at 8.6% for FY 11
 Divestment target set at Rs 40,000 Crs.
 FIIs allowed investing in MF schemes
 FDI allowed in MFs
 FII investment in Corporate bonds hiked 100% to USD 40 bn
 Taxfree bonds worth Rs 30,000 crs for infra to be allowed
 IIFCL disbursement target upped to Rs 25,000 Crs.
 Pension eligibility age cut to 60 yrs from 65 yrs
 FY11 fiscal deficit seen at 5.1%
 FY12 fiscal deficit target set at 4.6%
 FY13 fiscal deficit target set at 4.1%
 Tax exemption limit raised to Rs 1,80,000 from 1,60,000 for male. No change in limits
for female tax payers. For senior citizens limited hiked to Rs 2,50,000
 New tax exemption criteria for very senior tax citizens above 80 yrs. Exemption upto Rs
5,00,000
 MAT raised to 18.5% from 18%. SEZs to be under the MAT ambit.
Surcharge for companies reduced from 7.5% to 5%.
 Rs 20,000 exemption for investment into infra bonds extended by another one year.
 Service tax maintained at 10%.
 Government market borrowing target set at Rs 3,43,000 Crs. for FY12
 Base rate on excise raised to 5% from 4%.
 Health checkups under service tax ambit.
 Life insurance service providers to be taxed.

Our View:

 Fiscal deficit FY 11 projections in previous budget at 5.5% have come out to be just 5.1%
on actual basis.
 Although the actual have come out to be low, the numbers were expected to be much
lower looking at huge one time credits like 3G spectrum auctions. Projections for fiscal
deficit numbers for FY 12 and FY 13 look quite impressive.
 Market borrowing has been pegged at just Rs 3.43L Crs for FY12 which is way below
the previous years’ numbers. Low borrowing has been a big positive for the bond street
and would help the yields soften over the year.
 Inflows through divestment of Rs. 40,000 crs would help improve fiscal health – a
positive for both equity and debt markets.
 Allowing FIIs to invest in MF schemes a big move. The move is expected to give depth
to the markets. With India providing premium interest rates vis-à-vis developed
 economies and many emerging nations, we expect the move to boost FII inflows into the
economy. Reduction of surcharge for corporates also a big boost for debt mutual funds.
 The government has given a big push towards infrastructure spending by a) allowing
issuance of Rs. 30,000 Crs of tax-free bonds, b) Setting up disbursement target of Rs.
25,000 Crs for IIFCL, c) extending the Rs. 20,000 exemption limit on investments on
infra bonds by 1 year – thus inviting retail investment into the said sector.
 After a year of scorching food inflation, the government has given much deserved
attention to investments into agriculture sector. It has raised target of credit flow to
agriculture sector to Rs 4.75 trillion. Government has also given 3% interest subsidy to
farmers in 2011-12. Announced to developed warehousing/storage facilities upto 4M
tones in FY12. And cold storage chains to be given infrastructure status and thus inviting
huge chunk of institutional investments into the said sector.
 The tax exemption limit for senior citizens should have been hiked to atleast Rs 3,00,000
looking at the spiraling food inflation and medical costs. The new tax exemption of Rs.
5,00,000 for senior citizens above 80 years is a big move and is expected to benefit a
huge section of the society.
 Extending service tax on medical checkups and diagnostic services would make medical
services costlier. With the already existing sky-rocketing prices of medical services, this
would be a big drain on the pockets of senior citizens who avail these services on a
regular basis and have very few sources of income.

Budget Announcements

- Packaged software (including games and music): “Full exemption from payment of
Additional duty of Customs ( CVD) is being granted on the portion of value representing the
consideration paid or payable for the transfer of the right to use such goods to those packaged or
canned software, which do not require affixation of RSP under The Legal Metrology Act, 2009
or the rules made there under, subject to the Importer being registered under the Service Tax”
(source, source, and source)
- Service tax on money changing? (source)
- Mobile accessories: The concession available to parts, components and accessories for
manufacture of mobile handsets has been extended by a year, till 31st March, 2012 and a few
more items are being included in its ambit. This includes full exemption from basic customs
duty, additional duty of customs equivalent to excise duty and full exemption from Special
Additional Duty of customs on parts, components and accessories of mobile handsets, as well as
battery chargers, PC connectivity cables and hands-free headphones of such mobile
handsets and sub-parts for the manufacture of such parts and components (source, source and
source)
- Optical Drives become cheaper: The government also intends to expand the raw material list
for manufacture of specified electronic components that are fully exempt from basic customs
duty: Parts Parts of DVD Drive or DVD Writer, Combo Drives, CD-ROM Drives. (source).
- Printers: Also fully exempt from basic customs duty are inkjet and laser-jet printers (source).
Excise duty/ CVD is being reduced to 5% and SAD to NIL on parts of inkjet & laser jet printers
imported by actual users for manufacture of printers. (source)
– Printing equipment: The concessional rate of duty of 5% BCD, 5% Excise Duty/CVD & Nil
SAD presently applicable to High speed machinery (>70000 copies per hour) is being extended
to mailroom equipment viz.
overhead conveyor gripper, stacker, wrapper, labeler, strapper, inserters and delivery conveyors
designed for use with high speed printing machines with a minimum speed of 70000 copies per
hour, imported by newspapers registered with Registrar of Newspapers of India (RNI). [S. No.
267C of notification No. 21/2002-Customs inserted vide notification No. 21/2011-Customs
refers] (source)
– Minimum Alternate Tax (MAT) has been increased to 18.5% from 18%, but the current
surcharge of 7.5 per cent on domestic companies has been reduced to 5 per cent.
- MAT is now going to be applicable on developers (builders) of Special Economic Zones as
well as units operating in SEZs. (details)
- Rural Broadband and Telecom: Rural Telecom and Rural Broadband are included in (hence,
part of) an overall allocation of Rs. 58000 crore (which includes other rural initiatives). The
government plans to provide Rural broadband connectivity to all 2 Lakh Panchayats in three
years.
- Banking & Financial Inclusion: The government is gong to spend on a multi-media campaign
to promote the opening of bank accounts. The Banks have identified about 73,000 habitations for
providing banking facilities using appropriate technologies. During this year, banks will cover
20,000 villages. Remaining will be covered during 2011-12.
- UIDAI/Aadhaar: 2 million users have been given Aadhaar numbers, and the target is that by
1st October 2011, 1 million numbers will be generated per day.

- Manufacturing (impacts device and mobile handset manufacturing): To give a fillip the
manufacturing, the government intends to take the share of manufacturing in GDP from about 16
per cent to 25 per cent over a period of ten years. Government will come out with a
manufacturing policy, which will bring down the compliance burden on the industry through
self-regulation and help make Indian industry globally competitive.
- Smart Cards Get A Push: In order to bring transparency in government expenditure, the
Finance Minister has said that he favors the use of Smart Cards for targeting food subsidies, as
well as kerosene and fertilizer subsidies.
- National Knowledge Network update: will link 1500 Institutes of Higher Learning and
Research through an optical fibre backbone. During the current year, 190 Institutes will be
connected to NKN. Since the core will be ready by March 2011, the connectivity to all 1500
institutions will be provided by March 2012.
- R&D: no sops announced, just that a National Innovation Council under Shri Sam Pitroda has
been set up to prepare a roadmap for innovations in India, and the process of setting up State
Innovation Councils in each State and Sectoral Innovation Councils aligned to Central Ministries
is underway.
- Printers become cheaper: excise duty (and hence CVD) on parts of ink-jet and laser-jet
printers is being reduced from 10 per cent to 5 per cent.
- Air Travel will become more expensive, this will impact online ticketing busineses: The
service tax economy class on domestic air travel is up by Rs. 50, and Rs. 250 on international;
Travel by higher classes on domestic sector is subject to a standard rate of 10 per cent service
tax, on par with higher classes on international air travel.
- LED Lights: “In the last Budget, Central Excise duty on LED lights was reduced from 8 per
cent to 4 per cent to promote their use. The basic component of these lights viz. the LED attracts
an excise duty (hence, CVD) of 10 per cent and a special CVD of 4 per cent. The excise duty on
LEDs is being reduced to 5 per cent and special CVD is being fully exempted. These are also
fully exempt from customs duty.
– Cinematographic Films: “The Indian film industry has represented that colour, unexposed
jumbo rolls of cinematographic film are not manufactured domestically and have to be imported.
I propose to exempt jumbo rolls of 400 feet and 1000 feet from CVD by providing full
exemption from excise duty.”
– Cash Dispensers: are being fully exempt cash dispensers from basic customs duty, and parts
of such machines to encourage their domestic production.
– Sole Proprietership Audit: The number of assessees in service tax has grown manifold, many
of which are individuals or sole proprietors with small turnovers. All individual and sole
proprietor taxpayers with a turnover upto Rs. 60 lakh are exempt from the formalities of audit.
All assessees with turnover upto Rs. 60 lakh, the benefit of 3 percentage points in interest on
delayed payment.
– Indian Rupee now has a new symbol which has been notified for use by the Central and State
Governments, business entities and the general public. The Government has approached Unicode
Standards Authority for inclusion of the symbol in international standards.
- Central board of direct tax and central board of excise has enabled online filing of returns,
ECF facility, TDS now available througout the country, with the Centralized Processing Centre
(CPC) at Bengaluru increasing its daily processing capacity from 20,000 to 1.5 lakh returns in
2010-11. Two more CPCs will become operational in Manesar and Pune by May 2011 and a
fourth CPC will come up in Kolkata in 2011-12. Electronic filing of TDS has been stabilized.
CBTD wll provide a separate we based facility for taxpayers for tracking resolution of tax
refunds.

Other Notifications:

http://indiabudget.nic.in/ub2011-12/cen/ce0111.pdf

http://indiabudget.nic.in/ub2011-12/cen/ce0211.pdf

http://indiabudget.nic.in/ub2011-12/cen/ce0611.pdf

Pre budget: We’re particularly looking for announcements related to the National Broadband
Plan, Digitization of broadcast services in India (hence sops), Unique ID, Financial Inclusion
measures using mobile payments, expectations of revenues from FM Radio III auctions.
Budget 2011: What The Digital Industry Wants

very year, the IAMAI, the body representing mostly large Internet and some Mobile VAS
companies in India forwards suggestions it deems important for its members (let us know – are
all members consulted?), requesting certain sops from the Finance Minister from the Union
Budget.

We’re expecting some significant announcements for the Digital & Media industry given that a
National Broadband Plan rollout is expected, FM Radio Phase III licenses are expected to be
auctioned, and a digitalization plan is expected to be announced (which will require imports).
Even then, it is rare for requests from the digital industry to be entertained. Requests put forth by
the IAMAI, on behalf of its members:

- E-Commerce Tax Exemption: The Government of India should also recommend to all State
Governments to waive sales tax on goods and services that are transacted through electronic
mode (e-commerce) for the next 5 years up to limits to be prescribed by the Government.

- Entertainment Tax: The Government of India should direct to the State Governments to
waive Entertainment Tax, currently approximately 30% in certain states, levied on broadband
subscriptions and entertainment services, if they are provided through a broadband or Internet
platform.

- 5 year Moratorium on Service Tax: On Online Advertising and Online Services: The IAMAI
suggests that the online industry in India accounts for only 400 odd crores annually (Really?),
and a moratorium on service tax would help the industry grow: as a result, services will help
drive broadband penetration.

- Online Classifieds: a 5 year moratorium on service tax under section 65 (72) [zh]. Why? The
IAMAI estimates that the online classifieds industry alone pays Rs. 60 crore a year in service tax,
directly collected from the users by the service providers and submitted to the government.
These sites, though, drive broadband penetration and cater to tiny and micro industries run by
individuals.

- Depreciation For CapEx: Allow 100% depreciation in first year for PCs and broadband
Customer Premise Equipment (CPE) including modems and routers.

- Web Hosts: Profits that accrue to web hosting enterprises based in India should be partially
exempt from the income tax by at least 50% for the next 5 years.

- Annual broadband allowance: All corporations, whether public or private, should be allowed
to give a Rs. 6,000 per annum allowance to employees for broadband services access at home.
This allowance should be removed from taxable income for the corporation.
- Income Tax Exemption for five years for the following companies: service providers on
Internet and Mobile, companies providing Internet and broadband connectivity, Mobile content
providers, Mobile Value Added Services platform, technology and solutions providers, and
Transaction providers on the Internet and mobile devices. MediaNama adds: This is a fairly
standard, annual request. Given the national broadband plan, and the government expenditure
planned, we’d be surprised if this goes through. The rationale here is to offer the same incentives
to mobile and Internet companies, that were offered to IT and IT Enabled Services. But really,
can you expect mobile service providers to get tax relief, given the scale of profit?

- Cyber cafe’s be exempted from Service Tax for at least 5 years, but continue to pay service tax
to ISPs.

- Duties on Imports: Decreasing to the level of duties on mobile phones the current overall
levels of duties for imported items used in broadband networks, and equalizing duties on inputs
and domestically manufactured goods with those that are imported.

- Long term R&D Tax Exemption: Granting 100% deduction under section 80IB (8A) should
be extended up to 31 March 2015, since a tax shelter benefit for such ventures was terminated in
2007, at a time when Internet companies had not yet started significant scientific research and
development. Now they’re focusing on Internet access and services research. MediaNama adds:
Are Indian ventures really investing significantly in R&D? We’d like to see this go through, if
only because it might provide and incentive for Indian ventures to invest in R&D. More than
this, we’d like to see incentives being given to open-source ventures, over proprietary
technology.

- Product Development, Bandwidth Charges and Software License Expenses to be Treated

as Revenue Expenditure, with 100% deduction may be allowed in these items in the year that
these expenses are incurred. IAMAI explains: Internet Services and Mobile Value Added
Services companies invest highly in people and technology, but the nature of the industry is such
that the technology scenario evolves quickly. The government however, disallows such spending
as “expenses” treating them as items of long enduring nature.

- Abolish MAT: for high technology companies especially in the Internet and Mobile Value
Added Services sectors, to help manage their cash flows better. IAMAI Explains: Most Internet
service and Mobile VAS companies are operating at huge losses mainly on account of low
product monetization and due to the fact that most of the technical expenditure are treated as
capital expenditure. These companies are currently covered under MAT at the rate of 18% on
their book profit. MediaNama adds: To say that Mobile VAS companies are operating at a huge
loss is factually incorrect. This is true of most Internet companies, though.

- Encouraging the availability of low cost access devices through depreciation, donation and
recycling of used Pcs.

- Maintain Preferential Tax Treatment for longterm capital gains for VC Fund Issue:
Why? The IAMAI (falsely?) suggests that Venture Capital is the only source of funds for the
Internet and Mobile Value Added Services Industry, and this provision is necessary to provide
incentive for VCs to invest in India, else, they’ll invest in Israel, Eastern Europe and UK.

Note: these are fairly similar to last years requests, which you may read here.

Additionally, we have received a note from Airtel Digital TV, with the following requests for the
Finance Minister:
- Relief from the custom duty of 5% on Digital Set Top Boxes
- Implementation of Goods & Services Tax, since while DTH is a Central subject, the industry
continues to face entertainment tax sometimes as high as 25% (an average of 10%) from various
State governments.
- Another tax element for DTH operators is the License Fee of 10% which for some reason is
only levied on the DTH platform, an anomaly that needs urgent rationalization.
- Chipsets constitute the bulk of the STB cost, production of which is concentrated in the hands
of a select few international vendors, and with no indigenous manufacturing being able to
measure to such scale and standard, 95% of the demand for STBs is met via imports.