The $76-billion information technology (IT) and IT-enabled services (ITeS) has found itself at the receiving end of the Budget.
The finance minister sounded the death knell of the Software Technology Parks of Technology (STPI) scheme by being silent on its extension. The scheme ends on March 31. He also raised the minimum alternate tax (MAT) from 18 per cent to 18.5 per cent. MAT will now also apply to units in special economic zones (SEZs) and SEZ developers.
While the discontinuation of the STPI scheme will hit mid-cap IT services companies, extension of MAT to SEZ units will make sure that Tier-1 companies pay more taxes.
However, the industry has welcomed the reduction in tax on dividends received from foreign subsidiaries from 33 per cent to 15 per cent. However, this will be a one-time relief.
Industry body Nasscom expressed disappointment at the Budget proposals. “The IT-BPO sector faced double negatives – imposition of MAT on SEZs and withdrawal of tax exemption under Section 10A/10B. The SEZ Scheme was announced as an Act of Parliament. Only last year it was clarified that under the Direct Taxes Code, SEZ units set up till 2014 would continue to get profit-linked tax exemptions. Imposition of MAT at 18.5 per cent with an effective rate of nearly 20 per cent nullifies the impact of any such incentive,” it said.
“The Budget is on expected lines. We are yet to study the impact of MAT on SEZs. But otherwise, our tax outgo will be around 23 per cent once the STPI units are discontinued. The one positive is the reduction in the foreign dividend tax from 33 per cent to 15 per cent,” said S Mahalingam, chief financial officer, Tata Consultancy Services.
Uday Ved, the head of tax, KPMG, said that while the reduction of tax on foreign dividend was a positive, the discontinuation of the STPI scheme and bringing SEZ units under MAT were clear negatives.
“One of the reasons for imposing MAT on SEZ units could be because it is in line with the direct taxes code. However, what remains to be seen is its implementation. Will this 18.5 per cent MAT be applicable on existing SEZs or just new SEZs needs to be clarified,” said Ved.
Agrees Ganesh Natarajan, vice-chairman and CEO, Zensar Technologies. “I think this Budget is clearly aimed as rationalisation of tax rates. We did hope that STPI will get extended as DTC will be applicable only in 2012. But that did not happen,” said Natarajan.
“On the indirect tax front, the Budget does not seem to have addressed some of the key concerns of the IT industry in entirety. While simplified procedures for service tax refunds by SEZ units and a new scheme for exporters of ‘goods’ have been announced, the challenges currently being faced by IT ‘service exporters’ have not been addressed. Further, the demand for clarity on taxation of packaged software has only been partially dealt with,” said Ravi Vishwanath, tax partner, Ernst & Young.
Some positives:
Technology implementation is a key theme. The unique identification number project, GST Network, National Knowledge Network, Centralised Processing Units, rural broadband, etc, would provide additional opportunities for the industry to partner with the government.
“The emphasis has largely been on bridging the digital divide through use of IT and technology. This will translate into boost for domestic IT consumption,” said Kamlesh Bhatia, research director at Gartner.
Telecom industry disappointed
The finance minister has clearly ignored the telecom sector, while providing for a piecemeal concession to mobile handset manufacturers. He extended the concession available to parts, components and accessories for manufacturing mobile handsets till March 31, 2012, and said a few more items would be included in its ambit.
“The Budget 2011 covered too little on telecom, which is one of the fastest-growing sectors. There were no significant steps on spectrum-related issues. Neither was there any announcement regarding the renewal of 2G spectrum. Further, there are no service tax exemptions on broadband, which could have increased the penetration of broadband. The overall Budget impact may be positive, but no tax incentive to the telecom industry remains an area of concern,” said Parminder Kaur Saini, program manager, ICT practice, South Asia & Middle East, Frost & Sullivan.
“The continuation of benefits extended to the prevalent duties on parts/components of mobiles will serve to sustain the momentum of mobile manufacturing in the country.This becomes even more significant at a time when we are looking at 3G services being rolled out in the country and consumers will be looking at more affordable handsets to experience the full benefits of 3G services,” said Ranjit Yadav, country head , Samsung Mobile & IT.
S N Rai, co-founder & director, Lava. said, “For players like us who have a growing market in Tier-II and Tier-III cities, the extension of concession applicable to parts, components and accessories will definitely result in lowering the prices of devices, but the overall impact wouldn't be more than two per cent of the MRP.”
