April 06, 2020
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Holiday Homework

The industry is cheering another tax-holiday year on export profits. It better start preparing for a taxing life beyond.

Holiday Homework

Key Proposals

  • Export profits under Section 10A and 10B extended by one more year
  • Minimum alternate tax (MAT) rate increased from 11.33% (including surcharge and cess) to 17%
  • Fringe benefit tax (FBT) abolished
  • Creation of an alternative dispute resolution mechanism for transfer pricing issues

A longer extension of, say, two or three years would have enabled companies to plan their investments.

-- Ganesh Guruswamy, 
Vice-President & Country Manager, Freescale Semiconductor

Last year, the IT/ITES industry had to wait an agonising month after the Budget for the Finance Minister to announce an extension of the tax relief under the Software Technology Parks of India (STPI) scheme. This time around, Finance Minister Pranab Mukherjee saved them the suspense, by extending the tax holiday on export profits under Section 10A and 10B by one more year -- that is, 2010-11.

This extension means IT/ITES firms will continue to pay only the minimum alternate tax (MAT). Although the effective MAT rate, including surcharge and education cess, has been increased from 11.33% last year to 17% this year, it’s still a significant saving over the effective corporate tax rate of 33.99%. "We are happy," says Susir Kumar, Managing Director & Chief Executive Officer, Intelenet Global Services. "This will help us as our export revenues have been affected by the global slowdown."

However, some players wish the government had taken a longer-term view on this tax holiday. "A longer extension of, say, two or three years would have enabled companies to plan their investments," says Ganesh Guruswamy, Vice-President & Country Manager of Freescale Semiconductor. Partha Iyengar, Vice-President & Regional Research Director, Gartner India, quips the government has taken a long-term view with its piecemeal approach. "The writing is on the wall. The scheme isn’t going to continue beyond this extension."

Because of the higher MAT rate, the tax outgo for IT/ITES firms in the next two years will be higher than last year. "In today’s environment, when cash is king, companies may not like the higher outgo," says Apurva Shah of brokerage firm Prabhudas Lilladher. Adds KPMG Executive Director Naveen Agarwal: "Still, it’s not a big negative as they can claim credit for MAT once they start paying normal tax rates after 2011," he says. The exact tax outgo will vary, as most IT/ITES firms have foreign tax credits that they can set off against MAT.

The industry is happy that the universally-disliked fringe benefit tax (FBT) is being scrapped. KPMG’s Agarwal says converting what was essentially an employee tax into an employer tax was a major irritant. For example, in cross-border mobility situations, people coming from overseas could not claim credit on FBT, as it was not being taxed in their hands. "Restoration of this tax in the hands of employees is good news," he says. So, it’s not as if there’s going to be no tax on employee-linked benefits like stock options and superannuation. They will henceforth be taxed as perquisites in the hands of the employee. The impact on individuals will be neutral in instances where employers were recovering the FBT from employees. But for companies, it’s less of a headache now.

Another headache for companies that might be resolved is the creation of an alternative dispute resolution mechanism for transfer pricing issues, as most such litigation involves technology firms. Sudhir Kapadia, Tax Partner, Ernst & Young, says the proposal to rectify the dual levy of taxes on packaged software by removing the additional customs duty on right-to-use software for commercial exploitation was also a much-needed reform.

The thrust on higher education has also warmed industry bigwigs. "The increased investment in higher education, especially in IITs and NITs, will greatly benefit the industry in the medium- to long-term," says S Gopalakrishnan, Chief Executive Officer & Managing Director of Infosys Technologies. "On the whole, directionally, it is a good budget, given the current economic situation," he adds.

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