What does the Union Budget 2011 hold for the IT-ITES sector? Was it forgotten?
By Sherry Samuel Oommen & Jose Jacob
The month of February had a lot of public interest in it. The start of the ICC Cricket World Cup and the announcement of the Indian Budget by the Finance Minister witnessed a great deal of interest and anxiety by the public. It reminded me of a very old saying by a tax expert with a passion for cricket who said, “In cricket, form is temporary, class is permanent and in tax, tax reliefs are temporary, tax liabilities are permanent”. This Budget does prove the adage right especially considering the IT-ITES sector.
Whilst lot can be said on what could have been done or ought to have been undertaken, the purpose of this article is to revisit some of the key provisions of the budget which are summarized as below and the way forward for the industry.
Direct tax proposals
No tax holiday extension
As mentioned above, while the industry did vehemently push for an extension in the income tax benefits provided under section 10A and section 10B for units established in a Software Technology Park (STP) and Export Oriented Units (EOU) considering the sunset by 31 March 2011, the Finance Minister has not provided for any such extension. This will imply that effective from 01 April 2011, all STPs and EOUs operated by companies in India would be subject to tax in India at the rate of 32.45 percent, thereby increasing costs.
Provisions relating to dividend received from a foreign subsidiary company
The emphasis this Budget has also been in bringing in funds parked outside India back to India. In this context, with a view to ostensibly bring in such funds, the FM has proposed that dividends received from a foreign subsidiary would be taxed at a concessional rate of 15 percent instead of 30 percent. This is a ray of light if planned appropriately.
Pushing companies to the MAT
The software industry has been pushing for the roll-back of Minimum Alternate Tax (MAT) levied on profits of STP and EOU units. The Finance Minister has increased the rate of MAT from 18 percent to 18.5 percent of ‘book profits’ apart from the extension in scope to cover SEZ units and developers.
Indirect tax proposals
Service tax – A cash flow impediment
A major change brought about in the budget is the introduction of the Point of Taxation rules under Service Tax with effect from 01 April 2011. Going forward, service tax would be payable at the time of ‘rendering of service’ or ‘issue of invoice’ or ‘receipt of payment’, whichever is earlier; resulting in a cash flow impediment. This is a paradigm shift from the current scenario wherein Service Tax is payable only on receipt basis.
Amendments to CENVAT Credit Rules
In the present budget the Central Government has brought in several changes to the CENVAT Credit Rules, for instance, the definition of input and input service has been redefined, literally. This would require IT companies to re-evaluate items on which CENVAT credit can be availed.
Direct Taxes Code 2010 (DTC) & Goods and Services Tax (GST)
The Finance minister in his speech has emphasized that DTC would be effective from 01 April 2012 alongside reiterating his commitment on GST. The DTC has provisions that could drastically impact the way businesses function, while include the likely possibility of the incomes of a subsidiary being ploughed back to tax in India, which was hitherto, not taxable until dividends were distributed. Hence, ‘critical’ planning is the need of the hour.
Kerala IT News