Big Changes Are Expected With Next Year's Indian Budget

Investors in India are gearing up for the budget for fiscal year 2009 (ending March 31, 2009) set to be unveiled by Finance Minister Chidambaram on Feb. 29, 2008.

The government is expected to present a populist budget due to parliamentary elections next year in politically important states like Rajasthan, Delhi and Madhya Pradesh, et al.

In addition, the FM is likely to substantially increase spending on areas like health, rural development and growth and employment-creation schemes and incentives. The government is also set to reduce taxation on lower- and middle-income earners as well, which will spur increased investment from that class as well.

The following are the major changes in taxation expected in budget for fiscal year 2009:

Lower the peak custom duty from 10% at present to 7.5%

Lower custom duty on commodities and increase export duty on natural resources like iron ore

Lower the existing duty on petroleum products

Lower individual tax rates through reduction in surcharges or increase in the tax-exemption threshold

Keep the service tax unchanged, but widen the list of services that can be taxed

Lower the existing excise-duty structure.

In the capital markets, economists are expecting the FM to lower dividend taxes to 12.5 percent from the 15% at present and a small increase in securities transaction tax.

On the expenditure front, the following broad changes are expected:

Enhanced incentives and credits for the agricultural sector to correct lagging growth in that area

Improved credits and tax incentives for the infrastructure sector by naming the sector as a priority sector with tax-exempt status for infrastructure development bonds and liberal standards on external borrowings for infrastructure projects

Relief package for export sector like textiles and ITES which have been adversely impacted by the rising rupee

Increased focus on healthcare and education sectors with special tax benefits and credits to spur investment in these two critical areas

Increase in allocation for rural development and employment generation

I expect this budget to be friendly to the following sectors:

Textile exporters
ITES
Engineering and capital goods
Education
Infrastructure financing companies
Fertilizer sector.
Oil and gas companies
Software companies
Cement companies
Airlines
Steel companies
Pharma.

If you would like a list of companies within each sector that will be direct beneficiaries if the budget plays out as I have outlined above, feel free to email me at [e-mail].

Until the next time, happy investing.

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At the time of publication, Somaney had no positions in the stocks mentioned, although positions may change at any time without notice.

Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com, a subscription site that focuses on technology and Indian stocks (including ADRs), providing information, news and chatter. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback; click here to send him an email.