The Union Budget 2010-11 did not have much in store for the Indian IT sector. While the increase in MAT will increase the tax liability of the IT companies, decrease in surcharge and retention of service tax at existing levels are likely to have a positive impact. However the budget missed critical aspects like extending the tax-holiday under STPI at least for small IT companies and measures for preventing dual taxation of IT products. Nevertheless, the government’s focus on improving the delivery mechanism and operations of various development schemes through IT initiatives is a welcome move. Indian IT companies which have increased their focus on the domestic IT market have much to gain from increased usage of technology by the government.
Budget Measures
Rate of tax on services retained at 10% to pave the way forward for GST.
Rate of minimum alternate tax (MAT) on book profits increased from 15% to 18%.
Current surcharge of 10% on domestic companies reduced to 7.5%.
Redefined export of services so as to simplify the process of refund of accumulated credits to exporters of services.
A Technology Advisory Group for Unique Projects (TAGUP) to be set up.
Budget Impact
The increase in MAT from 15% to 18% is expected to further increase the tax liability of software companies and thereby erode their margins. This will particularly impact the cash flows of smaller companies which enjoyed lower tax-outlays under previous MAT policy.
Reduction in surcharge will lower the tax outgo. But the benefits generated through the reduction of surcharge are likely to be eaten up by increase in MAT. No extension of tax holiday under STPI scheme will corrode bottom-line.
Setting up of a Technology Advisory Group for Unique Projects (TAGUP) along with increased focus on e-governance will create more demand for IT in the domestic market. Increased allocation to the Unique Identification Authority of India (UIDAI) likely to benefit domestic IT players.
Simplification of refund process for exporters is likely to give some clarity in the issue. However no clarity given on the definition of software products which are usually treated as goods as well service may continue to lead to dual taxation.
Company Impact
Hike in MAT will increase the effective tax-liability of small and mid-cap companies, impacting their bottom-line. No extention in terms of STPI and SEZ tax-holiday policy will pinch all the IT players as the previous SPTI scheme expires this year.
Budgetary focus on UIDAI, NREGA etc coupled with overall strategy of improving the delivery mechanism for government initiatives will benefit IT companies like TCS, Wipro, Infosys, Mindtree and 3i Infotech which consider the Indian IT market as a major growth driver going forward.
Budgetary emphasis on elementary education and skill development can aid growth of companies like NIIT and Educomp Solutions.
The Union Budget 2010-11 did not have much in store for the Indian IT sector. While the increase in MAT will increase the tax liability of the IT companies, decrease in surcharge and retention of service tax at existing levels are likely to have a positive impact. However the budget missed critical aspects like extending the tax-holiday under STPI at least for small IT companies and measures for preventing dual taxation of IT products. Nevertheless, the government’s focus on improving the delivery mechanism and operations of various development schemes through IT initiatives is a welcome move. Indian IT companies which have increased their focus on the domestic IT market have much to gain from increased usage of technology by the government.