This year’s budget hardly had anything substantial to offer to the country’s much-prized IT sector

By Pupul Dutta

With India going to polls next year, the UPA government was faced with the task of winning over maximum voters or bring up the country’s economy whose growth has been slowing down for quite sometime. Quite obviously, Finance Minister P. Chidambaram chose to win over the voters by presenting a budget which was appeasing to the eyes and ears of the ‘aam aadmi’ but did not bring any joy to the corporate world—particularly to the IT sector.

Going by the past, the IT, ITeS and BPO industry have been beneficiaries of tax holidays or concessions in previous budgets given the fact they are significant contributors to India’s GDP. Therefore, this year too, the industry expected some goodies in the budget bag which unfortunately fell flat on their faces.

To begin with, last year’s budget had provisions in decreasing the surcharge tax limit on corporate tax to 5% from 7.5%. This helped Indian enterprises tremendously and the industry demanded the continuation of this provision in the current budget as well.

However, nothing was done to decrease the surcharge limit further and hence it remained static at the same level.

Secondly, the industry body also demanded the Minimum Alternate Tax (MAT) which levies taxes on SEZs to be either discontinued or reduced drastically as it severely affects foreign investments in India. This, according to the market experts, would have ensured continued momentum on investments which would strategically benefit the country in the long run. But this demand too was ignored by the FM in this year’s budget.

“From an IT standpoint, this is a marginally encouraging budget. We were hoping for the discontinuation of MAT on SEZs and apportionment of more grants to ensure secure data access which hasn’t been considered. The other disappointing aspect is the surcharge for MNCs in India which has been increased from 2% to 5%, if the taxable income exceeds Rs 10 crores,” notes Jagdish Mahapatra, Managing Director, McAfee India and SAARC.

Sanjay Dhawan, Technology Leader, PwC India further adds that this year’s budget was very disappointing with negligible benefits for the industry. “Unexpectedly, the budget did not offer fresh incentives for the technology sector,” he says, adding that there were a few common factors which have a bearing on the technology sector as well but did little to boost the confidence of the economy. “One is the increase in tax rates for ‘royalty’ and ‘fee for technical services’ to 25%. This can add to the cost of doing business and in net-of-tax contracts, the tax rate could be as high as 37.057%. Further, as a measure to curb tax avoidance, in case of buy-back of shares by unlisted entities, a tax of 20% has been introduced on the consideration paid in excess of sum received by the company at the time of issue of such shares.”

The government also increased the surcharge to 10% on domestic companies with annual income of more than Rs 10 crore and for foreign companies, who pay the higher rate of corporate tax, the surcharge will increase from 2% to 5%.

Another crucial issue that the industry wanted the finance minister to clarify, was whether software would be treated as goods or services for taxation purposes. Industry bodies say as the software products industry largely relies on sales through the channel ecosystem, the government should consider reduction of TDS for software resellers from the prevailing 10% to 1-2% to bring it in line with overall tax rates paid by corporates.

Further, the industry was also hoping that the government would clarify the definition of Place of Effective Management (POEM) in the proposed Direct Tax Code – the new taxation regime, given that there are lots of Indian subsidiaries of multinational companies.

A company which is a resident in India is liable to pay tax on its world-wide income. Under the DTC, the government seeks to define if the company is a resident by defining its POEM. As per international guidelines, a company’s POEM is a place where key management and commercial decisions, that are necessary for the conduct of the entity’s business as a whole, are taken.

Suman Reddy, Vice President and Managing Director, Pegasystems, quips, “From the IT sector’s perspective, we had high expectations from this budget to have some clarity on the transfer pricing and hoped for a structured framework in terms of policies for long term growth of the IT sector. We also had expectations on the infrastructural incentives for early stage start-ups. Most of these remained unanswered in this budget. However, the announcement of providing extended benefits for MSMEs up to three years of them graduating to a higher category is commendable.”

“On the other hand this budget lacked clarity on investment related policies. Though the finance minister mentioned in his speech, the objective of India being recognized as a country favorable for business and acknowledged the areas of concern such as easy policies and simplified regulations to achieve these objectives, there were no definite policy decisions taken on the same which was disappointing. Also there was no clarity on the policy framework for bringing in the FDI and FII,” adds Reddy.

A few positives

Proposals like modernization of the postal network which includes post offices becoming part of the core banking solution, and offering real time banking services and the plan for national roll out of Aadhaar-based schemes like the Direct Benefit Transfer (DBT) scheme, is expected to result in increased domestic IT spending. Furthermore, in order to promote the manufacturing of electronic goods in India, the budget’s proposal to provide incentives to semi-conductor wafer fab manufacturing facilities including zero customs duty for plant and machinery is a welcome move.

Anil Valluri – President, India & SAARC Operations, NetApp Marketing and Services Pvt. Ltd, notes, “Definitive measures around fiscal consolidation especially the announcement of the GST law and allocations toward CST compensation, are very encouraging.”

Summing up, though the budget did not meet majority of the demands of the IT industry, it managed to boost the investor confidence in some ways in the form of GST and DBT.