Increased focus on e-governance and consequent opportunities will be welcomed by the Indian IT/ ITES industry.  Reduction in the current surcharge rate for domestic companies (from 7.5 percent to 5 percent), coupled with an intention to phase it out altogether, is also a step in the right direction.  Industry IT players with global footprint/ subsidiaries could also seek to benefit from the concessional 15% tax rate, on dividend remittances from their foreign subsidiaries. 

On the flip side though, the absence of any extension of the tax holiday under the Software Technology Park Scheme (particularly for the small and mid-tier IT players), proves to be a dampener.  Also, the levy of Minimum Alternate Taxes on Special Economic Zone (SEZ) Developers, as well as existing SEZ Units (at an increased rate of 18.5 percent of book profits, such SEZ units being hitherto tax exempt),  is a setback for the industry which has been keenly looking at expansion opportunities in SEZs. 

On the indirect tax front, the Budget does not seem to have addressed some of the key concerns of the IT industry in entirety.  While simplified procedures for service tax refunds by SEZ units, and a new scheme for exporter of ‘goods’ have been announced, the challenges currently being faced by IT ‘service exporters’ have not been addressed.

Further, the demand for clarity on taxation of packaged software has only been partially dealt with, by providing for an exemption from excise and customs duty, on the value of licenses for packaged software without MRP.  The industry though was seeking comprehensive clarity under various statutes, on the over-lapping tax treatment on supply of ‘packaged software’, vis-à-vis ‘licenses’ for packaged software.  The industry has also been extended some relief in the form of customs and excise duty reductions on components of printers and DVD/ CD drives.

At a tax Policy level, the Finance Minister has expressed his continued commitment to introduce the Direct Tax Code from 1 April 2012 and take forward the GST roadmap (by seeking to introduce the necessary constitutional amendments, model GST statute/ rules, etc).  This reiteration is welcome.

To sum up, the Budget continues to focus on growth, along with fiscal consolidation and stability as its key themes.  The IT Industry though would believe that this Budget could have delivered more, particularly on the tax holiday extension, though this must be viewed in the context of the Government’s stated policy of convergence with DTC proposals, and consequent phase-out of most tax incentives.

The Author is Ravi Vishwanath, Tax Partner, Ernst & Young