Some cheer, some tears for IT

The finance minister announced the transition of the Unique Identification Authority of India (UIDAI) into an operational stage and allocated an amount of Rs 1,900 crores for this project.
The large allocation along with the proposal to constitute a Technology Advisory Group for unique projects is a welcome move and one that is likely to open up significant avenues for the Indian IT sector in the fast growing “e governance” market.

On the direct tax front, against expectations, no announcements were made on extension of the Software Technology Park (STP) holiday beyond March 2011.

Instead, the finance minister proposed an increase in the minimum alternate tax (MAT) rate from the current 15% to 18% with a reduction in the corporate surcharge rate to 7.5% from the current 10%.

While the effective corporate tax rate is therefore reduced to 33.22%, the MAT rate has gone up to 19.93% from the current 16.995%, thus increasing the cash outflow for tax holiday STPs.
It is hoped that these MAT taxes can be carried forward under the DTC regime. For the SEZ units, the retrospective correction in the SEZ tax holiday formula (from the time SEZ law was introduced) is indeed welcome.

On the indirect tax front, there is an increase in excise duty on computers (including servers) and packaged software from 8% to 10%.

Paying heed to industry representations, the finance minister has introduced an upfront exemption (instead of refund) of special additional duty of 4% on products imported in a pre packaged form and intended for retail sale (instead of the current refund mechanism).

This comes as a significant relief to hardware players, who were facing significant challenges in obtaining the refunds. Hopefully, this relief should counter the increase in excise duty rate and there should not be significant price increases with regard to these products.

Budget 2010 proposal to retain service tax at 10 percent is a welcome one. Also, relaxation of the condition of “used outside India”, for export of services would provide significant relief to service exporters in the IT industry.

A beneficial amendment has been made to enable speedy refund of accumulated tax/ duty credits used for exporting services - this should bring about a benefit for the IT/ ITES service exporters.
All in all, its a mix bag for the IT sector.

Mahesh Jaising is partner and Kalpesh Maroo, ED, BMR Advisors.