Non-Extension of the ten-year tax-holiday under the Software Technology Parks of India (STPI) scheme proved to be a major disappointment for the $50-billion software services export sector. Increase in the minimum alternate tax (MAT) to 18% from 15% for the second successive year came as a dampener.
The new tax structure is expected to be a big blow for small IT companies. ?While large companies will be able to mitigate the tax pressures by moving in special economic zones (SEZ), small and medium-sized companies may be impacted adversely as they do not have the size, scale and financial wherewithal to avail the benefits of SEZ,? said Lakshmi Narayanan, vice-chairman, Cognizant. Lack of extension of STPI benefits has the risk of reducing India?s attraction as a global outsourcing destination, according to Ananda Mukerji, MD & CEO of BPO major, Firstsource Solutions. IT industry body Nasscom is still hopeful of engaging with the government to represent for an equitable benefit to the SME sector.
Apart from the MAT rate going up to 18%, (effectively 19.93% after including the surcharge and cess), the fact that the Direct Tax Code, which will be implemented by April 2011 has no provision for the carry forward of the MAT credit will prove to be a big loss. ?The increase in MAT rate will not only impact the cash flow of IT companies, it will also hurt companies which have accumulated huge amount of MAT credit over the years,? said Uday Ved, head of tax at KPMG. The impact would be bigger on companies that do not have investments in SEZ units. According to estimates, Rs 13,460 crore of the industry?s revenue was generated out of SEZ units in FY 2008-09.
However, in his Budget speech, finance minister Pranab Mukherjee, announced several measures which were hailed by the industry with the biggest being the removal of anomaly pertaining to the SEZ Act, post the rectification in the last Budget. ?According to the amendment now, companies will be able to avail the benefits of the rectified with retrospective effect from April 2006,? said KR Girish, senior partner, BSR & Co. Moreover, the Budget has made the service tax refunds for exporters easier.
The setting up of a Technology Advisory Group under the chairmanship of Nandan Nilekani, presently chairman of the Unique Identification Authority of India (UIDAI), will unlock several opportunities for tech players in the domestic industry. Moreover, allocation to UIDAI has been increased to Rs 1,900 crore from Rs 120 crore in the last Budget.