The country?s $50-billion software services and BPO industry, which is disappointed by the non-extension of the 10-year tax-holiday under the Software Technology Parks of India (STPI) in the Budget, could have another reason to worry about if the Direct Tax Code is implemented in the current form next year. While announcing the Budget 2010-11, finance minister Pranab Mukherjee had said the DTC along with the goods and the services tax (GST) will be implemented from the April 1, 2011.
For the IT industry, which has been enjoying the benefits of the tax-holiday so far, the Budget has proved to be a double-edged sword, as the industry will not only be taxed at a higher rate with STPI expiring in March 2011, but will also lose out on the minimum alternate tax (MAT) credit accumulated over the years as the DTC has no provision for it in its current form.
MAT is the tax paid by companies which are under some tax-holiday and are not eligible to be taxed under the standard bracket. However, MAT paid over the years gets accumulated and can be deducted from the tax liability of the company in a stipulated time frame. ?The IT industry always had the cushion that irrespective of the rate of MAT they could carry it forward and retrieve the tax paid later. However, the DTC in its current form would mean that all the credit accumulated will lapse,? said KR Girish, senior partner, BSR & Co. The fact that the expiry of STPI and implementation of DTC is coinciding means that companies have very less chances of availing the credit, which will impact their profit margins in a big way. Though it is difficult to arrive at the total loss that the industry could suffer on account of this, companies that will stand to lose the most will be firms that have very little domestic exposure along with the ones that have not been able to avail credit for many years now.
?We are hoping that certain parts of the DTC will be reconsidered before it is implemented,? said Pranav Satya, tax partner, Ernst & Young.
While the last Budget increased the rate of MAT from 12 to 15% along with extension for the carry forward from 7 to 10 years, Budget 2010-11 further increased the rate to 18%.