Union Budget FY12: Implications for the Transportation & Logistics Sector - Zubin Poonawalla

March 17, 2012 - PRLog -- The Union Budget FY12 has been a mixed bag for the transp & logistics sector. While re-stating focus on GST & FDI in multi-brand retail is a welcome move, the lack of critical sops such as infra status to the wider logistics industry & setting up an inter-ministerial logistics body at the Union level for integrated & quick decision-making is a lost opportunity. Diving deeper into the budget announcements, we analyze key aspects of the Budget in this document while also capturing significant policy & market developments that have taken place in the last one year.
The year that went by – a quick glimpse
Macro-economic perspective
•The GDP growth for FY11-12 was projected at around 9%; however, the actual GDP growth estimate is at 6.9 %. At the same time, sight must not be lost that in comparison to the other economies of the world, India still remains amongst the front runners.
Industry size
•Transport & logistics sector which is estimated to be over $ 90 billion is likely to grow at 10-15 % CAGR till FY15.
Road sector
•In FY11-12, 1,250 kms of roads have been developed under NHDP & further projects of 4,374.9 kms have been awarded. Road sector requires an estimated investment of Rs 6.11 lakh crs out of which 38 % would be contributed by private sector.
Port sector
•The past year has witnessed increasing thrust to timely meet the milestones stated in the Maritime Agenda 2020 which has been targeting over 3,000 MT port capacity by FY20. Also, in FY12 the govt proposed to develop two new major ports, one each on east & west coasts & build facilities for full mechanization of cargo handling & movement. Additional proposed policy measures also target corporatization, formulation of a new land policy for major ports, & establishing of a port regulator for all ports for setting, monitoring,regulating service levels,technical & performance standards.
•The slow pace of implementation of projects under NMDP (2005-12) has led to only 20 % of number of  projects & planned investments being realized till FY10 against a time line of 100 % completion in March 2012.
Rail sector
•Freight loading by railways was 618.0 MT as compared to 593.4 MT reflecting an increase of 4.14 %. The Vision 2020 document of the MOR projects investment need of INR 7,20,000 cr for the sector.
Airline sector
•Domestic & international airline passenger traffic registered growth of 19.4 % & 7.7 % respectively. The sector would be supported by an investment of over INR 80,000 crs.
Policy developments
•A harmonized list of main sectors & sub-sectors of infra has been approved by the govt to serve as a guide for all agencies responsible for supporting infra
•While the DTC is to be introduced soon, the implementation of GST has been pushed to Aug 2012.
•Airlines have been allowed importing ATF for their own consumption under open general license. Further, VAT on ATF has been slashed to 4 %. Airline sector has also been allowed to procure ECB for working capital with a cap of $1 billion for one year. FDI up to 49 % in aviation sector is also under consideration.
•To boost the funding for road sector, NHAI is allowed to issue INR 10,000 cr by way of infrastructure tax free bonds.
•Set-off of export receivables against  import payable has been liberalized providing powers to AD Category I Bank easing compliance reqs. Export payable & receivables can be thus netted off subject to the prescribed conditions.
•Maritime Agenda 2020 has been formed targeting 3,130 MT capacity for ports by FY20. The govt proposes to develop 2 new major ports, one each on east & west coasts & build facilities for full mechanization of cargo handling & movement & plans to develop 2 hub ports each on west & east costs.
• Govt is encouraging PPP projects in areas such port connectivity projects, container operations, wagon investment schemes & private freight  terminals. The ministry is in process of finalizing a comprehensive draft policy emphasizing models for specific category of project.
•Tax treaties have been signed with many countries providing impetus to foreign shipping cos from these countries to commence operations in India.
•Recently, the proposed Direct Tax Code has recommended that import freight received outside India should not be chargeable to tax in India.
Budget proposal for income tax
•No change in corporate tax rate has been proposed and effective rate remains 32.45 %.
•Alternate Minimum Tax has been proposed to be leviable on all forms other than cos who have claimed profit deduction under Chapter VIA
•Rate of daily tonnage income under the tonnage tax scheme is to be increased which would lead to higher tax outgo
•Investment linked incentives under section 35AD are to be extended to CFSs, Inland Container Depots & warehousing facility for storage of sugar. The existing allowance of deduction of capital expenditure for business of warehousing of agricultural produce & cold chain facility is to be increased from 100 % to 150 %.
•The quality of warehouses is expected to go up. CFS/ ICD set ups are expected to benefit from stuffing/ de-stuffing services.
•Further, the announcements in the budget are expected to encourage development of single-commodity, small size warehouses across geographies.
•The payback period for cold chain assets is expected to get reduced from 6-8 years to 5-6 years.
•Withholding tax rate on interest payments on ECB availed by airlines, roads, ports & shipping sectors is proposed to be reduced from 20 % to 5 % which would help companies to look at overseas market for their borrowing needs. Generally the contracts for ECB are not net basis wherein the taxability is to be borne by Indian companies & thus involve higher cost. Owing to change in rates, the cost would significantly go down.
•Advance Pricing Arrangement is to be introduced with effect from 1 July, 2012 for better assurance on transfer pricing method & is conducive in providing certainty.
•General Anti Avoidance Rule (‘GAAR’) provisions are to be introduced to clamp down on tax avoidance.
•Section 9 has been proposed to be retrospectively amended to provide that capital asset being any share of a foreign company shall be deemed to be situated in India if the shares derive its value substantially from assets located in India.
•Definition of royalty is to be amended to specifically include consideration for  use or right to use computer software settling long drawn controversy on the issue.
•Retrospective amendment has been proposed to give powers to Dispute Resolution Panel (DRP) to enhance income. The Assessing Officer is to be also provided powers to appeal against order of DRP to Tribunal.
•TDS provisions would be rationalized to provide that payer would not be treated as assessee in default in case the payee files return of income offering the amount for tax on which tax has not been deducted amendment would take effect from 1 July, 2012. Also, the amount would not be disallowed under section 40(a)(ia) in the hands of payer.
•Rate of Dividend Distribution Tax (DDT) has remained unchanged at 16.221 %. However, cascading effect of DDT in multi-layer structure is proposed to be rationalized. Dividend received by Indian companies from outbound investments (holding more than 26 % shares) is to be taxed at the rate of 15 %  for one more year.
•Scurrilities Transaction Tax (STT) rate has been reduced by 20 % to 0.1 % which will bring down cost of equity transaction.
Conclusion
Overall, the Budget is forward looking since it addresses several operations & tax concerns for the industry. However, given that several critical industry expectations are yet to be formally appreciated by the policymakers, the industry stakeholders, both supply-side players & end users, perhaps need to together reinforce the demands.

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