IT industry expects Budget to set right taxation anomalies

Written by P P Thimmaya | Bangalore | Updated: Mar 16 2012, 09:19am hrs
With the export-oriented information technology industry facing strong headwinds from the global economic slowdown, the sector is expecting the forthcoming Union Budget to set right what it calls taxation anomalies, thereby easing some of the pain.

The $88-billion Indian technology industry, which includes IT services & BPO and hardware, has been crying hoarse about the lack of various tax incentives which were provided in the past. The end of the Software Technology Park of India (STPI) scheme, providing income tax exemption to the IT companies for a period of ten years, has been replaced by a new special economic zone (SEZ) scheme. A 18.5% minimum alternate tax (MAT) for SEZs has not helped either.

The industry body Nasscom in its pre-budget recommendation had said, The SEZ Act was enacted by the government of India in 2005 to stimulate exports and generate large-scale employment. The most salient incentive has been income tax exemption of export profits which had contributed to the schemes success in attracting major investments. However, various policy changes, such as replacing the exemption in March 2011 with refund mechanism for input services, and the imposition of MAT on SEZ units from FY12, has diluted the incentive and created a deterrent for future growth of SEZs.

Nasscom has also sought for the withdrawal of MAT under SEZs. MAT has hampered the progress of small and medium sized IT firms.

Infosys CFO V Balakrishnan said, The industry is not expecting any major concessions in the forthcoming Budget but we are facing a lot of issues which are creating practical difficulties.

Examples include onsite income for Indian IT companies which are exempt from income tax under Section 10A and 10 AAA being taxed, or refund under the service tax being delayed.

The hardware side of the story is no different. Operating in an atmosphere of wafer thin profit margins with huge emphasis on manufacturing, the sector is hoping that the Budget would be able to create conditions which will spur growth and bring in investments.

Manufacturers Association for Information Technology (MAIT) president Alok Bharadwaj said the industry has had a very forgetful financial year, with an inverted duty structure and rupee depreciation resulting in very flat growth for the sector.

The hardware industry has sought the abolition of various kinds of duties to make the sector competitive. Many IT manufacturing companies have already closed its operations in India and retrenched many employees due to an inverted duty structure.

The hardware industry has sought for abolition of 4% special additional duty (SAD) as this has negated the tax benefits any manufacturer could avail for making value additions in their products.

MAIT has also sought changes in certain other tax structures, like withdrawal of MRP-based assessment of IT products, increase in deductions on IT products from 20% to 40% in order to cover their manufacturing costs and other levies. The association also demands abolition of duties on import or manufacture of computer goods for government departments.