Budget Provisions
The budget proposes to enhance the allocation to the Department of Information Technology from Rs 1952 crore in 2008-09 to Rs 2802 crore in 2009-10. The budget proposes allocation of Rs 600 crore towards establishing National Knowledge Network, Rs 900 crore towards e-Governance programme, Rs 550 crore towards National Informatics Centre and Rs 125 crore for Centre for Development of Advanced Computing for undertaking R&D.
The budget proposes to exempt the value attributable to the transfer of the right to use packaged software from excise duty and CVD.
The budget proposes to abolish FBT.
Industry expectation -- Not fulfilled
Currently service tax is at 10% whereas the excise duty/CVD is at 8%. The Industry is recommending that the service tax rate be aligned with the excise duty/CVD rate.
All IT products and components imported are subject to Special Additional Duty (SAD) of 4%. The whole idea behind levying SAD was to align it with CST being charged on domestic--manufactured products. With CST being phased out, the Industry is recommending phasing out of SAD.
The Industry is recommending the rate of abatement be increased to 35% from the current 20%. IT products like notebooks, printers etc. are taxed on MRP and abatement is provided while computing duty to neutralize the effect of local taxes and channel margins.
The Industry is recommending the clarity on taxing of packaged and customized software. There is confusion regarding levy of duty and service tax on software products.
Budget Impact
- The increased allocation towards Information Technology would be positive for the sector with higher demand from the Government/Public sector.
- The removal of FBT would be earnings accretive to the Computer -- Hardware Companies.
- The exemption of the value of right to use packaged software would give some relief to the product centric Companies.
- The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector. On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.
- Also, the hike in MAT will not be earnings dilative but will only be cash flow dilative. The increase in liability towards MAT will be matched by an incremental deferred tax credit.
Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%. But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them.
So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilative but cash flow dilative. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.
MAIT welcomes Union Budget
MAIT, the apex body representing India's IT hardware, training and R&D services sectors, welcomed the thrust given in the Union Budget towards sustaining the national economic growth and making it inclusive.
Further, the industry body expressed satisfaction for the thrust given to infrastructure development, upliftment of the rural economy and launch of several schemes towards promotion of education, especially among the socially and economically backward.
Vinnie Mehta, Executive Director, MAIT, said, "We welcome the government's decision to maintain the current excise and custom duty levels on IT products and components. The hardware industry supports long-term stability in policies and duty structures as frequent changes adversely impact the investment and business plans of the industry. Further, the focus given to education especially for the 'mission in education through ICT', increased allocation for upgradation of Polytechnics, IITs, NITs is indeed very welcome. This is as suitably skilled human resource is critical to sustain the competitiveness of the IT industry in country."
Mehta added, "We are glad that the Hon'ble Finance Minister has unveiled the roadmap for GST, which is very critical for creating a single-India market. This calls for unification of the rate on excise duty and the service tax. The service tax continues to be at 10% while the rate of excise duty is 8%. Going ahead, the industry expects better involvement and engagement with the Government as the finer details of the GST are worked out."
"Further, the Union Budget has also addressed the issue of taxation on packaged software. The licence/right to use part of the value of the packaged software would now be subjected to service tax only and not Excise duty/CVD, this is as per the industry's recommendation. However, the issue of State Governments' levying VAT on 'software' already treated as 'service' remains unresolved."
Elaborating on the outcome, he added, "It is heartening that the Hon'ble Finance Minister has recognised the strong potential of the electronics hardware industry. In this regard, the announcement of reduction in customs duty on LCD panels and exemption of CVD on parts and components of mobile phones for manufacturing these products locally is truly welcome. However, to sustain hardware manufacturing in the country in the long run, it is critical that SAD be abolished on finished goods and components or made at par with the CST."
"Lastly, MAIT welcomes the creation of the Unique Identification Authority of India (UIDAI) which will go a long way in addressing the security and challenges of the governance in national programs especially for the poor. Similarly, modernisation of employment exchanges and creation of integrated web portal would allow for better mapping of skill sets with suitable jobs ensuring transparency and better productivity." mentioned Mehta.
Some of the other noteworthy outcomes of the Union Budget 2009-10 are:
- Extension of Section 10A & 10B of the IT Act by another year. This will enhance the confidence of the IT export sector, which has been facing challenges due to the global economic crisis.
- The removal of the Fringe Benefit Tax.
Setting up of an "alternative dispute resolution mechanism" for resolving transfer pricing dispute under the CBDT. This will help boost the confidence of foreign investors in the IT sector.
Stocks to watch
HCL Infosystems, Bartronics, CMC
Outlook
On an overall basis the budget will have a positive impact on the sector with regards to driving of demand on account of higher allocation. However, most of the recommendations on the indirect taxes ere not fulfilled.
With economic slowdown, the sector has been hit by slower retail demand. The sector would be looking forward to the government demand to fill in the shortfall.
