The Indian IT sector which saw a phenomenal growth of over 30% per annum till last year, is one of the sun-shine sector of the economy. The sector got impacted by the global meltdown as revenues decreased on account of subdued demand and pricing pressure. Nevertheless, the sector clocked export revenue of US $ 40.3 billion, growing at a decent 17% in FY09. It is combating the slowdown through diversification in terms of geographies and industry verticals and a change in business model. On back of robust customer relations, strong deal-pipelines, increased domestic demand and improved business models, the Indian IT industry stay poised to weather the global downturn and emerge out stronger. Government policies play an important role in the growth of the IT-BPO sector which has been contributing significantly to India's export earnings.
Budget Measures
Sunset clauses for deduction in respect of export profits under sections 10A and 10B of the Income-tax Act being extended by one more year i.e., 2010-11.
On packaged or canned software, excise duty exemption to be provided on the portion of the value which represents the consideration for transfer of the right to use such software, subject to specified conditions.
Fringe benefit tax (FBT) abolished.
Rate of minimum alternate tax (MAT) on book profits has been increased from 10% to 15%, but with a provision of carrying forward the tax credit on MAT to ten years from the current seven years.
Budget Impact
One year extension of sunset clause for tax deduction will enable the IT setups in the STPIs and SEZs to enjoy the tax-holiday for one more year.
Abolition of FBT is expected to decrease the tax liability of organizations, thereby aiding their net profits. This will also encourage employers to provide better facilities and benefits to the employees.
Exemption of service tax on packaged software to prevent the double-taxing where-in the service provider had to pay excise duty or countervailing duty (CVD) as well as service tax, resulting in an increase in prices of such software.
The increase in MAT from 10% to 15% is expected to increase the tax liability of the companies and thereby decrease their net profit figures. This will particularly impact SMEs in the sector which enjoyed lower levels of tax-outlays under previous MAT policy. Nevertheless, the increase in carry-forward window to 10 years to have a positive impact.
Company Impact
Extension of tax-holiday under STPI scheme likely to help big IT companies like Infosys, TCS, Wipro and Tech Mahindra having setups in Special Economic Zones (SEZs). Though the extension of just one year will not help small and mid-cap IT companies in a very big way.
FBT abolition will benefit the IT companies immensely. This will make ESOPs more attractive.
The removal of CVD on packaged software will result in decrease in price of such products benefitting the IT companies which use these softwares extensively.
Hike in MAT will increase the effective tax-liability of small and mid-cap companies, impacting their bottom-line.
Budgetary focus on projects like Unique Identification for Indian citizens, e-passport, NREGA etc will benefit Indian IT companies like TCS and Infosys through increased domestic demand for IT and ITES.
The Indian IT sector which saw a phenomenal growth of over 30% per annum till last year, is one of the sun-shine sector of the economy. The sector got impacted by the global meltdown as revenues decreased on account of subdued demand and pricing pressure. Nevertheless, the sector clocked export revenue of US $ 40.3 billion, growing at a decent 17% in FY09. It is combating the slowdown through diversification in terms of geographies and industry verticals and a change in business model. On back of robust customer relations, strong deal-pipelines, increased domestic demand and improved business models, the Indian IT industry stay poised to weather the global downturn and emerge out stronger. Government policies play an important role in the growth of the IT-BPO sector which has been contributing significantly to India's export earnings.