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Union Budget for India 2011-2012-The Salient Features

Posted in Finance Articles, Total Reads: 9102 , Published on February 28, 2011

After every year, the most awaited policy which catches the eye of every citizen of India, has again created the hysteria and buzz it always creates. Every citizen eagerly awaits for the one policy that will guide their lifestyle and that is the Budget.

The budget 2011 aims is to sustain and improve growth rate, get it to 9 percent in the near term and to a double digit rate in the medium to longer term. The two areas of focus are Infrastructure development especially in Rural India.  Budgets looks to reduce inflation reduce current account deficit and increase fiscal consolidation.  As the Budget sets a lower deficit and net borrowing target, it is not expansionary, and does not conflict with the Reserve Bank of India’s measures to tame inflation. The Railway Budget of 2011 also aims to benefit the common man.

Budget 2011-2012

Key Points of the budget :

Food Items: Finance minister has introduced initiatives to increase food production and distribution efficiency. Although the food inflation has reduced from 20% last year to 9.6% this year, it is still on the higher side. Food, vegetables, Meat etc will show an easing of prices in the medium term future. The Public Distribution System (PDS) is also a pivotal part of the budget.

Education: FM has increased the funds allotted towards education sector by 24% as compared to last year. Apart from education, the government also has to focus on improving the condition of the unorganized sector.

Income Tax: A small hike of Rs 20000 in the exemption limit for tax payers has been introduced. The senior citizens can feel happy as the FM has decrease the income tax "senior citizen" definition from age 65 to age 60 thus giving a big benefit to those born between 1946-1951. And for those who survive all the hardships of life and live to be over 80 they get a higher limit of 5 lakh.

The direct taxes code(dtc) has been proposed to be implemented from Aril 1, 2012. This has been in the news for quite some time and is expected to make taxes much more simpler and better.

Direct transfer of Cash subsidy to be given to people below poverty line so that delivery of Kerosene, LPG and fertilizers happen in a more efficient and accountable manner.

The 2011 Budget is also special as it has to cover the Census 2011 and the National Population Register (NPR), along with the Unique Identity Card (UID).

Foreign Investment: The business environment is set to improve for foreign companies (MNC) as the government is looking at further liberalizing the (Foreign Direct Investment) FDI policy. More Foreign Direct Investment can only be good for the economy. Investment in infrastructure will go up since FII investment in corporate bonds has been raised.  FDI in mutual funds will enhance liquidity.

Infrastructure: Government’s is constantly moving towards better Infrastructure development and this was adequately demonstrated by an increase of  25.3% to INR 214,000 crores. The most significant reform in the real estate sector includes the increase in the limit of investment by Foreign Institutional Investors (FII) in the infrastructure corporate bonds to a total of USD 25 billion which is likely to result in increased flow of funds from foreign investors in this sector.  Additionally the FIIs are permitted to invest in unlisted bonds with a minimum lock-in period of three years.

The government has also proposed the creation of Special Purpose Vehicle (SPV) through notified infrastructure debt funds in order to attract foreign investment in the infrastructure sector. The interest on borrowings of these funds is subject to a withholding tax rate of 5 per cent instead of the current rate of 20 per cent and income of the fund is subject to exemption.

Tax free bonds worth INR 30,000 crores have been allowed. This would encourage investment in various sub sectors of infrastructure. In particular, Housing And Urban Development Corporation Ltd (HUDCO) has been allocated INR 5,000 Crores as a part of this scheme which is likely to result in increased investment in the housing sector.

In order to facilitate the funding of rural infrastructure, the corpus of the Rural Infrastructure Fund (RIDF) was raised by Rs 20 billion to Rs 180 billion for 2011-12.

Tax benefit of INR 20,000 for investment in long term infrastructural bonds will continue for one more year. This is expected to give additional source of funds to the infrastructure sector which is one of the prime focuses in the budget.

The idea seems to be that the government will provide the basic foundation for the development of economic centers, which the private sector can build on.

Housing Loan: Loan limit has been enhanced to Rs 25 Lakh for housing under priority sector lending. Interest subsidy (subvention) of 1% on housing loan has been liberalized. People in the lower financial spectrum to get benefit from Mortgage Risk Guarantee Fund.

Agriculture: Higher allotment under Rashtriya Krishi Vikas Yojana of Rs 7860 Crores could see more support for the agriculture sector in India. Agriculture credit has been raised to Rs 475,000/- crores. It is proposed to recognize cold chains and post-harvest storage as an infrastructure sub-sector with 100% exemption of excise duty exemption on the equipment and machinery.

The levy of minimum alternative tax (MAT) on units in SEZs is expected to increase the effective tax rate, impacting the profitability of IT companies across the board. The non-extension of STPI benefits is expected to increase tax rates, thereby affecting the cash flows of IT companies, especially mid-tier IT companies. The marginal increase in MAT, from 18 per cent to 18.5 per cent, is expected to be offset by a decrease in the surcharge from 7.5 per cent to 5.0 per cent, keeping the effective MAT rate at the same level.

The levy of a 5 per cent service tax on room accommodations and 3 per cent service tax on restaurants will negatively impact players in the industry. Competition is intense in the current operating environment; hence, the ability of hotel players to pass on levy of service tax by way of higher charges is limited.

Service tax on air travel has been hiked, this can mean more turbulence in the aviation industry. Hospitals (over 25 beds) will have to pay tax on all services.

Overall, budget has not favored any particular sector except agriculture and infrastructure which is the need of the hour. These are the two most critical sectors which will provide long term food stability and better infrastructure.

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