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Budget Provisions
The budget proposes to increase the MAT limit from 15% to 18%.
The budget proposes to reduce surcharge on domestic companies to 7.5% from 10%.
The budget proposes to make the process of refund of accumulated credit to exporters of services, especially in the area of Information Technology and Business Process Outsourcing, by making necessary changes in the definition of export of services and procedures.
The budget proposes to give the effect of the clarification given in the Finance Act 2009 on the issue of dividing the 'export turnover of the unit' by the turnover of the business w.r.t. sub-section (7) of Section 10AA should be made effective retrospective from April 1, 2006.
The budget proposes to exempt from service tax pre-packaged I.T. software, with the license for right to its use, subject to specified conditions.
The budget proposes to allocate Rs 1900 crore towards the Unique Identification Authority of India towards operations of the authority to issue the first set of UID numbers in the coming year.
Further, the budget proposes to set up Technology Advisory Group for Unique Projects (TAGUP) which include IT projects like Tax Information Network, New Pension Scheme, National Treasury Management Agency, Expenditure Information Network, Goods and Service Tax, which are in different stages of roll out.
Industry expectations partly fulfilled
Very few of the major industry demands were fulfilled. Following were the industry expectations:
Industry recommends that the tax exemption for STPs continue for another 5 years (beyond March 31, 2011) so that companies can continue availing of benefits and have the time to adjust to the SEZ framework, which will take the next 2 or 3 years to really get operational. This extension should be made concurrent with the tax holiday provided for exporting units in SEZ.
The industry recommends that Section 10 AA should be amended to allow flexibility to SEZ units to avail income tax exemptions for any 5 consecutive years within the first 10 years of its operation.
The industry recommends that the clarification given in the Finance Act 2009 on the issue of dividing the 'export turnover of the unit' by the turnover of the business w.r.t. sub-section (7) of Section 10AA should be made effective retrospective from April 2006.
The Industry recommends withdrawal of MAT on 10A and 10B units as it neutralizes the tax benefit intended for STP and EOU units.
The industry is recommending higher tax incentives for the BPO sector.
The industry recommends elimination of dividend distribution tax of 16.995% as it has resulted in multiple taxation of profits distributed as dividends, particularly in a case where the corporate group had a holding company and its step-down subsidiary.
The Industry recommends suitable modification of the definition of software under the service tax law so as to make distinction between software as service and software as goods. Currently, there dual taxation and unwarranted litigation on the definition of software. The supply of software as well as right to use the software (packaged or customized) is covered under VAT and software service is covered under service tax.
The industry recommends that the outlay for higher education must be upped minimum four fold. It also sees a need to fast-track public-private partnership (PPP) projects for quicker implementation.
Budget Impact
The increase in MAT rate from 15% to 18% in effective terms to 19.93% from 16.995% would mean higher cash outgo as the companies would now have to pay tax at 19.93%.
However, the Companies would get MAT credit on the amount paid for the next 10 years and benefit of which would be taken when the Company starts paying tax on income tax profit rather than book profits. The Company would create a deferred tax asset for the MAT paid.
The reduction in surcharge would lead to lower tax outgo for domestic IT companies.
The budget has given effect to the clarification with regards to calculation of SEZ profits, which would clear the cloud in this matter.
The exemption from service tax of right to use with regards to pre-packaged software lead to remove the double taxation impact. Now, only VAT would be applicable.
The starting of the UID projects and formation of TAGUP would speed up tendering process for the technology set up and up gradation of the systems.
The extension of sunset clause with regards to STPI benefits under section 10A/10B post March 31, 2011 has not been done. There is still one more year to go for the benefit to expire.
Stocks to watch
Infosys Technologies, TCS, Wipro
Outlook
On an overall basis, the budget proposals will have a negative impact on the IT-ITES companies. The increase in the MAT rate would lead to higher cash outgo. Also, no word on the extension of sunset clause would mean problems for the small & medium IT companies, if the sunset clause is not extended.
The large IT companies have started their SEZ facilities and most of their units would be out of STPI benefit by end of next year. The budget provisions would mean impact on the bottom line of IT companies.
In case the tax exemption on STP units is not extended, the effective tax rate is estimated to increase to the 22-28% range (up from 15-19% currently) depending on the offshore/onsite mix, proportion of revenues from SEZ units and the contribution from the domestic business.On the demand scenario however, the IT-ITES industry is seeing some revival in demand with IT budgets expected to be either flat with an upward bias. For FY2010-11, NASSCOM expects Software and Services exports revenues to grow by 13-15% and domestic revenues to grow by 15-17%.
In its recent report by Forrester, an independent technology and market research company, it predicts US IT spends to grow by 6.6% in CY2010 after declining by 8.2% in CY2009. The December 2009-quarter results of IT companies saw volume growth and margin stability. All indicates a better future for the sector after a lull of 12-18 months due to the global credit crisis.
