MUMBAI: A recent JP Morgan report titled “Budget FY04 Preview – easy on consumers, harsh on corporates” says the media sector will receive a positive impetus from a drop in the duties of set-top boxes (STBs). The report adds that a change in the tax regime is unlikely to affect media companies.
 

The positive impetus for the media sector is likely to come from the drop in the duties of set top boxes, says the JP Morgan report. This, it says, will likely reduce the prices of such boxes considerably, as a lead-in to the higher penetration of the conditional access system.
The report explores the impact of the budget on certain issues which are related to the media sector.

Foreign limit on DTH (direct to home): The report states that the limit is likely to be increased but not by a huge margin as CAS is being implemented. 

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Duty on STBs: This duty is likely to come down from 50 per cent to around 16 per cent. The STB prices would come down and this would provide an impetus to the adoption of STBs by the consumers. Zee Telefilms would be positively impacted by the same. However, the report maintains its overweight status on the Zee Telefilms scrip at a price level of Rs 84.80. 

Change in corporate tax: The report expects that the marginal tax rate will be changed to 30 per cent. The impact will be minimal as the listed entertainment companies are paying taxes at this rate.

In summary, the report expects the budget to be easy on consumers and harsh on corporates. It adds that the major considerations for this year’s budget are likely to be: 

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(1) the high fiscal deficit;

(2) key state elections in 2003 and federal elections in 2004; 

(3) global uncertainty and

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(4) a comfortable liquidity situation with low interest rates.

* Given the proximity to elections, the government will likely dole out sops to consumers in terms of lower effective taxation. These include higher exemption limits, abolition of tax on dividend and, possibly, the removal of long-term capital gains tax. This has to be compensated elsewhere, given the high fiscal deficit levels.

* For corporations, the budget should reduce import tariffs, which could be negative for commodity companies. There could be a roadmap to increase effective taxation rates through reduction in exemptions, which could hurt low tax-paying companies.

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* On excise, there should be further rationalization, which should be a long-term positive.

* Further efforts at fiscal consolidation through reduction in the government’s borrowing costs by buybacks of government debt at lower-than-market rates could be a short-term sentiment dampener-especially for the banking sector.

* The government could work at giving further incentives to investments in infrastructure by raising money through voluntary disclosure schemes-a long-term positive.

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* Given that the equity market has been more or less flat over the past month, there does not seem to be a build up of excessive optimism in the market pre-budget. However, we believe that the chances of a major post-budget rally are not too great either, given the likelihood of the budget’s possible negative implications for corporate India. Additionally, the possibility of a conflict in the Middle East will continue to weigh on the stock market in coming weeks.