Budget Measures Hike in corpus of Rural Infrastructure Development Fund-XIII and Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) Private sector participation in transmission projects and hike in budgetary support for APDRP Reduction in customs duty on imports of medical equipments to 7.5% Increase in allocation to defense to Rs 960 bn, including Rs 420 bn for capital expenditure Concessions under section 80IA for infrastructure facilities extended to cross country natural gas distribution network, including gas pipeline and storage facilities integrated to the network Customs duty on sprinklers and drip irrigation systems for agricultural & horticultural purposes is reduced from 7.5% to 5% Concessional customs duty of 5% on specified plantation machinery extended by two years to April 2009 Customs duty on food processing machinery and parts reduced from 7.5% to 5% Dividend distribution tax to be hiked from 12.5% to 15% Additional education cess of 1% to fund secondary and higher education  Budget Impact Increase in corpus of RIDF-XIII and higher allocation for RGGVY to aid addition to power capacities for rural areas. Private sector participation in transmission projects likely to lead to higher spending and faster creation of transmission infrastructure, thus benefiting transmission equipment companies Higher education cess and dividend distribution tax to impact net profits and retained earnings, though the impact will be marginal Lower customs duty on sprinklers and drip irrigation systems to benefit agricultural productivity Higher education cess and dividend distribution tax to impact net profits and retained earnings, though the impact will be marginal  Sector Outlook We maintain our positive outlook on engineering companies post the budget announcements. Hike in allocation for rural infrastructure development, boost to power generation and transmission segments and increase in defence capital expenditure are some of the positives to have come out of from the proposals. From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. The realisation finally seems to be setting in, as seen from the slew of investment measures announced in this budget. Apart from power, the potential for the sector lies in the oil and gas industry, where high global demand has led to increased action in exploration and production activities.  Company Impact Boost to rural electrification and focus on private sector participation in transmission to benefit equipment makers like BHEL, Siemens, ABB, Alstom and Areva T&D Increased allocation to defense to aid private sector players like L&T, Tata Power and Astra Micro Lower customs duty on sprinklers and drip irrigation systems to impact domestic manufacturers like Jain Irrigation  Industry Wish List Mr. Y. M. Deosthalee - Whole time Director and CFO, L&T Dividends received by an Indian company from a foreign company that is either its subsidiary or a joint venture, though received in foreign exchange, are taxable in India. In order to encourage investments by Indian companies abroad, such dividends in foreign exchange should be made tax-free. Exemption on long-term capital gains and concessional rate on short-term capital gains should also be available on off-market transactions as well - strategic acquisitions, mergers, de-mergers, business sale etc. Fringe Benefit Tax (FBT) needs to be rationalised. The specified expenses for levy of FBT should be confined to only those expenses incurred in relation to employees. Expenses not resulting in any benefit to employees should be excluded. Dividend Distribution Tax (DDT) should be abolished since it results in double taxation of income. In the event that it continues, a system of exemption of DDT on dividend received from step-subsidiaries should be available. Infrastructure is identified as a major thrust area by the government. Exemption earlier available of interest and long-term capital gains of infrastructure capital companies derived from lending / investments made in infrastructure projects, housing projects and SEZs, be reinstated. The rationale for the earlier withdrawal of exemption does not hold good any longer with the increase in interest rates. Benefit of tax holiday to entity developing, maintaining or operating infrastructure facility, to be extended to the third party to whom the job of developing the facility is sub-contracted. Private sector licensed manufacturers of defence equipment be eligible for exemption from excise duty on job work inputs to ensure a level playing field. Provisions requiring submission of declaration forms for every quarter and within 3 months of end of every quarter allow less time for collection of the forms. It is suggested that at least a 2- year period be allowed for collection and submission of forms. Printing of declaration forms on dealers' stationary should be permitted as benefit of computerisation can be availed.  Budget over the years Budget 2004-05 Budget 2005-06 Budget 2006-07 Government's stress on infrastructure spending, in areas like power, construction, ports, and civil aviation Specified raw materials for manufacture of parts of cathode ray tubes and specified capital goods for manufacture of mobile handsets, plasma display panels exempted 10% rebate on railway freight rates for heavy machinery 2% education cess on all taxes A special purpose vehicle (SPV) to be launched to finance infrastructure projects that are financially viable. Investment limit for 2005-06 is fixed at Rs 100 bn. NHDP-III to be launched in FY06 to target selected high density highways not forming part of the GQ or the N-S E-W corridor; Rs 14 bn provided in FY06 to four-lane 4,000 kms. Excise duty on ACs has been reduced from 24% to 16%. Estimated outlay for Jawaharlal Nehru National Urban Renewal Mission to be Rs 62.5 bn during 2006-07, including a grant component of Rs 45.9 bn. Through this mission, the government intends to promote establishment of new towns, preferably focused on a specific industry (IT) or a specific theme (education or health). Budget support for National Highway Development Programme (NHDP) enhanced from Rs 93.2 bn to Rs 99.5 bn in 2006-07. Special accelerated road development programme for the North Eastern region proposed at an estimated cost of Rs 46.2 bn approved with allocation of Rs 5.5 bn in 2006-07 1,000 kms of access-controlled Expressways to be developed on the Design, Build, Finance and Operate (DBFO) model. Capital expenditure on defense proposed at Rs 375 bn. Peak rate of customs duty on non-agricultural products has been reduced from 15% to 12.5% with a few exceptions. Exemption to specified goods for making capital goods for setting up a unit with an investment of Rs 50 m or more withdrawn. Resin binders used for manufacture of rotor blades for wind operated electricity generators exempted from excise duty. Under NELP VI, 55 blocks and area of 355,000 sq kms offered. Investment of Rs 220 bn expected in the refinery sector in the next few years. Five ultra mega power projects of 4,000 MW each to be awarded before December 31, 2006 [Read more on Budget 2004-05] [Read more on Budget 2005-06] [Read more on Budget 2006-07]
Key Positives Power play: Since power utilities are one of the biggest consumers (generation, transmission and distribution) for engineering companies, reforms introduced in the power sector like privatisation of SEBs will help in strengthening the order book size. Huge addition in power generation capacity, in order to meet the demand supply gap will be a big positive for the sector. Infrastructure development: The government is focusing on development of infrastructure like housing, airports, roads and ports. This will be big positive for engineering and construction companies Industrial 'act': Industrial divisions of engineering companies are likely to benefit from the increased focus on automation and capacity addition plans drawn by the India Inc.		Key Negatives Slow pace of reforms: Since the government is planning to review some of the provisions of the Electricity Act, reform implementation could slow down. To that extent, the order booking for engineering companies could grow at a slower rate. Captive competition: Duty free import of T&D equipments by captive power generation units, if allowed by government, can have some impact on margins of the T&D majors because of competition.

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