The Hindu Business Line : No high tea for IT

The status-quo-ante in corporate tax and service tax rates proposed in Budget 2007 was expected since tax rates are now at optimal levels. The increase in dividend distribution tax by 2.5 percentage points, bringing ESOPs under the tentacles of FBT, encompassing the scope of MAT to Section 10A and 10B companies are the other major proposals that would concern IT companies.

The recognition of IT companies for pass-through status for venture capital funds that invest in them and the exemption from service tax for technology business incubators and incubatees with a threshold turnover of Rs 50 lakhs or less are the other IT-specific features of the Budget.

The removal of the surcharge for companies with a taxable income of Rs 1 crore or less is bound to give a small tax breather for applicable companies.

The ESOP-FBT nexus is not going to be a happy one for IT companies. While this was bound to happen sooner rather than later, it has diluted a major employee benefit tool for corporates.

Already there is a trend among corporates to reduce the FBT component while doling out the relevant perquisite which can be expected in ESOPs too, since in most of the cases the stakes are pretty high.

The hike in dividend distribution tax should not upset too many apple-carts since the percentage increase is relatively low. The proposal to include Section 10A/10B companies under MAT is surprising, as the sunset year for these Sections is only a handshake away. The fact that the recent SEZ initiative was converted into a land-grabbing charge should have prompted the Finance Minister to consider either extending or confirming the terminal year for the Section 10A/B benefits.

The uncertain state of STPI units regarding tax exemption could have also been resolved by making a firm statement about the same.

To summarise, a Budget that should prepare IT companies for tougher times to come.

(The author is a Hyderabad-based chartered accountant.)