The Union Budget 2003-04 is expected to have a mixed bag of surprises for the fast moving consumer goods sector.

The FMCG companies are likely to benefit from the increase in the abatement rate for excise duty but cigarette companies are expected to be hurt the most.

The increase in abatement rate for excise duty on soaps and detergents is expected to be between 35 per cent and 40 per cent.

Industry associations have asked for an increase in the abatement rate on soaps, detergents and scouring preparations, from the current level of 35 per cent to at least 40 per cent.

The Federation of Indian Chambers of Commerce and Industry has recommended an increase in the abatement rate for cosmetics, hair oils and toilet preparations, from the current level of 40 per cent to 50 per cent.

Considering the rationale of the demand, analysts expect a change in the abatement rate in excise duty, which will be in favour of corporates.

The demand for a reduction in the basic customs duty on industrial oil (used in toilet soaps) and LAB (used in synthetic detergents) in order to ensure a duty differential of 10 per cent over its feedstock, if fulfilled, will bring cheers to the industry.

A reduction in the customs duty on LAB from 25 per cent to 15 per cent and the de-reservation of the toothbrush and toothpowder segments from small-scale industry requirements will also work out in favour of FMCG majors.

Meanwhile, cigarette manufacturers face an increased threat from imports particularly in the filter segment if the basic customs duty is cut by 5 per cent in line with peak rate and excise duty.

While the steep excise hike of fiscal 2002 did not yield commensurate returns, unchanged excise tariffs for fiscal 2003 have resulted in a three per cent increase in excise-duty collections for the April-November 2002 period.

Analysts expect a modest 3-4 per cent increase in excise for fiscal 2004.

While the specific rate of excise is expected to be retained at current levels, the peak duty rate on cigarettes is expected to be raised to the maximum permissible rate.

However, this is unlikely to materially benefit the industry, as most of the imported cigarettes are smuggled into the country, evading excise, analysts say.

They also expect some restrictions on tobacco imports under baggage rules, duty-free shops and imports for re-export, so as to curtail the extent of smuggling in the country.

The sector has a high effective rate of taxation and a low asset base (resulting in a low depreciation/profit before tax ratio compared to other industries).

Therefore, it will benefit from the proposed reduction of corporate taxation even if the depreciation norms are tightened.

Run-up to the Budget 2003