This union budget is packed with excellent intentions insofar as it endeavors to maintain economic growth, fortify infrastructure and trim down societal disparity through comprehensive development. Greater allocation of funds to agriculture, infrastructure, education and health is creditable. What remains to be seen is how well these initiatives are put into effect.
From IT industry’s perspective, I don’t think that this budget has not got much applaud. Various areas where we were expecting the FM to step in like continuation of the 10A benefits under the STPI schemes, reduction in corporate/MAT tax rate, revamping of dispute resolution panel, simplification of service tax refunds, re-fixing tax slabs for individuals etc. have either been unscathed or marked with trivial change or modified to augment the misery of IT companies.
The budget didn’t extend of tax holiday to STPI units beyond March 31, 2011. Though this was not from nowhere, not extending the benefit will only add one more challenge to the many other challenges as wage inflation and attrition, which are already impacting the cost competitiveness of India. This budget brought a net saving of 0.78% in corporate tax cost. In contrast, there has been a net increase of 0.08% in MAT rate & MAT provisions have been extended to SEZ units/developers. Increase in MAT will negatively hit the cash flow of companies liable to pay taxes under MAT - there will be financial loss on account of time, value of money. Also, with the difference between the corporate tax and MAT now getting narrower, new entrepreneurs and start ups are bound to find it all the more difficult to compete against established businesses.
On transfer pricing frontage, we look forward to a favorable allowable variation in safe harbor margin for IT industry. Also, we anticipate that the additional powers vested upon the TPO will be judiciously utilized. On DRP, not much has been mentioned about the architecture, improvement process etc.
On individual tax, for men, the saving of Rs 2060 p.a. is meager and there is no additional saving for women. Given the mounting inflationary pressure, the janta was expecting a larger relief. It is interesting that additional deduction of INR 20,000 in long-term infrastructure bonds has been extended for one more year. Not revisiting total deduction available under Sec 80C was certainly dampening.
On indirect tax, the rollback of the stimulus both in excise as well as service tax rates has not been tinkered with. This is a respite. On service tax, we anticipated that procedure for simplified and speedy refund of CENVAT credit will be announced - this was missing. Also, some radical changes have been introduced under the CENVAT credit scheme. Point of Taxation Rules will be attention-grabbing. The expectation for clarity on taxation of packaged software has only been partially dealt with.
We were also expecting to see reduction in price of petrol & reduction in excise duty rate and corresponding cutback in price of commodities. That has not come about.
Greater impetus on e-governance and consequential opportunities will be welcomed by the Indian IT/ ITES industry. At a tax Policy level, the FM has reiterated his continued commitment to introduce the Direct Tax Code from 1 April 2012 and take forward the GST roadmap. Let’s hope that the DTC and GST are implemented simultaneously w.e.f. April 1, 2011.
In conclusion, I reiterate the words of Hon’able FM, “As an emerging economy, with a voice on the global stage, India stands at the threshold of a decade which presents immense possibilities. We must not let the recent strains and tensions hold us back from converting these possibilities into realities”.
The Author is Karandeep Singh, MD, Sapient India.