Budget ignores IT's tax worries

IT & TELECOM: No clarity on MAT, but the govt's focus on Aadhaar will mean more IT spend

The Information Technology (IT) and IT-enabled Services (ITeS) industry has not been a focus area for Budget 2012-13.

The Finance Minister has left several demands of the industry in limbo. Yet again, the Budget has emphasised the need for e-governance and the role of Aadhaar in various government programmes, but it left unaddressed the industry’s demand to remove the 18.5 per cent minimum alternative tax (MAT) imposed on Special Economic Zones (SEZs) and onsite software services.

National Association of Software and Services Companies (Nasscom), on Friday, expressed its disappointment on the Union Budget Proposals 2012-13, terming them as a ‘lost opportunity’ for the economy. “Budget 2012 is disappointing on various counts — there is no focus on putting the economy on a high growth trajectory; fiscal deficit reduction is through higher taxation, rather than expenditure management,"” said the IT industry body. It also added that though APA has been introduced, the negative is that transfer pricing regulations have now been introduced for domestic transactions, further increasing the complexity.

“The software industry had also been asking for greater clarity on MAT, which is being levied on SEZ revenues that are exempted from tax. Companies claim refund after paying MAT but face cash flow issues in the meanwhile as MAT rates are almost close to corporate tax levels. The timelines for SEZ approvals for IT projects could have been extended beyond 2013-14 because a lot of campus development programmes are currently going on. This is disappointing,” said S Mahalingam, chief financial officer, TCS.

“(There’s) nothing much in the Budget for IT and not enough focus on incentives for skill building or Tier-III cities. The announcement of advance pricing agreement may help transfer pricing decisions,” said Ganesh Natarajan, president & chief executive officer (CEO) of Zensar Technologies.

The Budget also increased the service tax rate from 10 per cent to 12 per cent. While the increase will not impact IT services players, it will impact packaged software, the prices of which could go up.

A big positive for the industry has been the inclusion of advance pricing agreement (APA) in the Finance Bill. “One of the key demands of the IT/ITeS sector was on transfer pricing arrangements, given the substantial number of disputes that have arisen over the last years. Provisions relating to APA will assist in reducing these disputes. Hopefully, rules relating to safe harbour regulations would also not be delayed further, so as to further reduce the scope for disputes,” said Ravi Mahajan, partner, tax & regulatory services, Ernst & Young India.

Matthew Vallance, MD & CEO, Firstsource Solutions, believes by introducing APA, the government is following a global practice. “We welcome this move. This will provide tax assurance and help the government analyse a transaction before it takes place, rather than wait for a couple of years till the assessment of tax return is started,” he added.