Refineries: No reduction in custom duty

Budget provisions

The following changes in the duties have been proposed in the Union budget 2011-12:

Direct Taxes Code (DTC) to be finalized for enactment during 2011-12. DTC proposed to be effective from April 1, 2012.

Central Excise Duty to be maintained at standard rate of 10%. Base rate on excise duty raised to 5% from 4%

Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%

Minimum Alternative Tax (MAT) increased from 18% to 18.5% of book profits. However, adjusted for surcharge reduction the effective rate remains the same

Lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary Service tax rate held at 10 percent

MAT on developers of Special Economic Zones as well as units operating in SEZs

Direct cash subsidy to people below poverty line to be implemented in phased manner.

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Budget impact:

Although refinery sector had huge expectations from budget 2011-12 no sector specific announcement was made in the budget. So it has a neutral impact on the sector.

Only non MAT tax paying companies would be marginally benefited with reduction in surcharge from 7.5% to 5%.

Stocks to watch

Indian oil, BPCL, HPCL, RIL, Essar oil

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Outlook

Despite deregulation of petrol prices and a hike in retail prices of other regulated fuels in June 2010, oil marketing companies continue to incur losses on diesel and cooking fuels as the price hike is not in line with the rise in crude oil prices.

With crude oil prices further on boil with problems in Middle East under recoveries are on rise no reduction in custom duty on crude oil prices is a huge negative.

The direct cash subsidy to people below poverty line is positive for PSU refiners but its implementation in near term looks distant. Overall Budget 2011-12 seems negative for refinery sector.