Budget 2009-10: Impact on the IT and BPO Industry

Wednesday, 08 July 2009

The Budget for 2009-10 was a mixed bag for the IT and BPO industry with no clear long term benefits announced. Extension of tax holiday – Short-term respite! One of the positives is the extension of tax holiday for Software Technology Park of India (STPI) scheme. The industry was eagerly awaiting the announcement of extension to the tax exemption given to export income under the STPI scheme. The extension of the STPI scheme provides short-term relief to the industry, which is facing tremendous margin pressures due to the economic slowdown. This will have a significant impact on almost all IT and BPO companies in the immediate future. However, extension of the 10A benefit for a period of five years could have done the industry much more good and a reason to celebrate. In addition to this, the budget has cleared the long standing ambiguity in Section 10AA on the 100% tax holiday. Until now, tax holiday applies to the profits of a company’s operation within the special economic zone (SEZ). However, the Finance Minister has now extended the tax benefits to the total earnings of the ‘undertaking’. Some other positives Some of the recommendations by the Finance Minister of relevance to the BPO/IT sectors include the following. Removal of Multiple Taxation on ‘Packaged Software’: A move towards removal of multiple taxation on ‘packaged software’ will help in adoption of IT in general, and also reduce costs for all businesses, and especially IT and BPO companies which are big buyers/users of technology. However, clarifications are awaited on issues of defining transfer of rights to use, software valuation and coverage of the current exemption that will enable better quantification of the extent of benefits. Abolition of Fringe Benefit Tax: This is another positive for the companies, though marginal (FBT accounts for not more than 5% of the total tax provisions of these companies). This however will reduce the administrative burden for companies and might bring back the popularity of ESOPs. Increased Outlay for Institutions: The Finance Minister has given special attention to the education sector and has proposed increased outlay for institutions such as IITs and National Institutes of Technology (NITs) to Rs 20,000 m. This will benefit the industry in the long term with the availability of a larger and employable talent pool. Safe-harbor Mechanism for Captive Centers: The Central Board of Direct Tax (CBDT) will formulate a safe-harbor mechanism for the captive centers (software and back office) of multinational companies. The safe-harbor provisions are expected to provide a degree of certainty to the captives of foreign companies in matters of taxation as the results declared by taxpayer who fulfill some prescribed conditions are accepted without detailed scrutiny. However, this is just a proposal at this stage and benefits will depend on its implementation. Disappointments! The increase in minimum alternate tax (MAT) from 10% to 15% was a disappointment, especially at a time when the companies across industries are facing credit crunch. Increased MAT will affect cash flows of companies at a time when liquidity is critical. While this negates the positives of the budget proposals and lands the IT sector in negative territory marginally, the good news is that the budget does allow the companies to carry forward the tax credit from the 7 years period to 10 years. Over the last decade, IT and BPO industry combined have significantly contributed to the country’s GDP, exports and the employment (employing over two million people). This industry can contribute with further growth at similar rates in future. However, the economic downturn has put tremendous margin pressures on the companies. The industry has been demanding several exemptions and tax benefits and the government needs to do more by providing long term incentives to ensure sustainable competitiveness of the sector.

 

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