Budget 2007: Causing concern for the Indian IT industry

The 2007 Budget has spelt dismay, rather than delight for the Indian IT-BPO industries. The February 28 announcements by Finance Minister P. Chidambaram on the floor of the house, have drawn more frowns than cheers from the IT sector.

A quick study of the Budget indicates the concern areas, that are likely to have a detrimental impact on the growth of the Indian IT-BPO industries. Meanwhile, here are the changes that have been ushered in by Budget 2007.
1. Effective corporate tax for domestic companies up from 33.66 to 33.99 percent as a result of an increase in the education cess from 2 to 3 percent. Limited relief in the form of abolition of surcharge for companies whose income is up to one crore rupees.

2. Dividend distribution tax increased from 12.5 to 15 percent, resulting in effective DDT going up from 14.025 to 16.995 percent.

3. Proposal to extend MAT to income in respect of which deduction is claimed under sections 10A and 10B. This introduces a 11.33 percent cost to such operations—while creditable in future, there will only be a three year window beyond the expiry of the tax holidays under these sections to set-off the MAT paid during the year 2007-08. SEZ units seem to have been left out of the applicability of the MAT.

4. SEZ units faced with restrictive covenants imported from Chapter VIA and sections 10A/10B. These now restrict tax holidays to units that are not formed by splitting up, reconstruction, and clearly spell out the intent of law to provide section 10AA exemption only to “new” units, contrary to the belief held in some quarters.

5. ESOPs brought under FBT. The value of the fringe benefit to be determined, in accordance with a prescribed method, on the date of exercise of the option. Introduction of FBT on ESOPs likely to hit several compensation schemes, burdening employers with additional cost. The entire Fair Market Value will be the taxable value of the fringe benefit, resulting in a tax rate of 33.99 percent on such costs.

Indirect Tax:

1. Test of Export of services made simple, instead of delivery and use outside India, the test to be “provided from India and used outside India.” This could help determine the eligibility for exemption of certain IT services with more clarity

2. Service tax extended to rentals on leasing of immovable property for commercial and business purposes. Introduction of service tax on commercial renting of premises to add to the costs of software companies which will be badly hit as their services are treated as “non-taxable” and hence, refund of such service tax would not be possible

3. Content services for on-line information and database access or retrieval services liable for Service tax

4. Maintenance or repair services to include software services as well
Rs.33 crore allocated for a new scheme of manpower development for the software export industry