The Hindu Business Line : IT left hanging

A first reading of the fine print of Budget 2007 seems to suggest that a number of provisions have been proposed which would have an impact on the growth of the IT/ITeS sector itself.

The industry was expecting an extension of the tax holiday under Section 10A beyond March 31, 2009. However, this has not been met in Budget 2007.

Currently IT/ITeS companies are claiming tax holiday under Section 10A/10B of the Act on their export profits. The 10-year tax holiday is subject to sunset clause of March 31, 2009. Accordingly, these companies are paying corporate tax only on domestic income. Further, the export profits are exempted from MAT.

However, Budget 2007 proposes to bring Section 10A/10B companies within the ambit of MAT. This proposal seems an attempted backdoor entry to tax profits of IT/ITeS companies before the committed timeline of March 31, 2009.

However, Indian flagship companies paying tax in foreign jurisdictions would be able to claim credit for such taxes against MAT provided they operate under a branch structure. On an average these companies had an effective tax rate of around 4 per cent and this would jump many fold as the MAT effective rate is 11.33 per cent.

One of the options that STP units are exploring is shifting/migrating to the SEZ regime after March 31, 2009.

Under the current provisions of Section 10AA dealing with tax holiday for SEZ units, there are no splitting up/ reconstruction provisions.

Budget 2007 proposes to insert splitting up/ reconstruction provisions in Section 10AA which are similar to those existing in Section 10A and 10B. If the proposal were accepted, existing STP units will not be able to migrate to the SEZ regime. This may create different playing fields for STP units vis-à-vis SEZ units.

The rate of Dividend Distribution Tax is proposed for increase from 14.025 per cent to 16.995 per cent. This will impact the amount of distributable dividends to shareholders and more so for foreign companies operating in India under wholly owned subsidiaries, as in most cases this is not creditable.

Currently ESOP expense in the case of an approved plan is not subjected to FBT. Further, the same is not taxable in the hands of employees at the time of vesting/ exercise of the options. It is taxable in the hands of the employees as capital gains only at the time of selling the shares allotted under the plan.

The Finance Bill proposes to subject ESOP expenses to FBT. The FBT is proposed for levy on the difference between the fair market value of the options on the date of the exercise and the amount recovered from the employees. Guidelines for determination of the fair market value would be notified.

To top it all, IT companies would have to shell out service tax on the lease rentals on commercial property, without the recourse of any setoff.

All these proposals really mean that this sector, which has been the flagship of India on the global map, rather than getting kudos has been at the receiving end.

(The author is Partner, Tax & Regulatory Services, BSR & Co, Bangalore.)