Budget impact on IT industry: EY

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The Finance Minister's budget proposals have evoked mixed reactions from the IT industry. Several proposals introduced by the FM will bring cheer to the industry that has been facing the brunt of the global slowdown, spiraling costs, a volatile rupee and protectionist policies of the Obama administration. However, the industry will be disappointed with the lack of major long term policy announcements in the Budget.

Corporate tax related proposals

In a move, which will provide some short term relief to the IT industry, the FM has extended the income-tax holiday, currently availed by units operating out of Software Technology Park (STP) or registered as export orientated undertakings (EOU) by 1 more year, up to March 31, 2011. This move will have a positive impact on IT companies, which are battling the economic downturn.

However, this positive development has been countered to some extent by an increase in the rate of Minimum Alternative Tax (MAT) from 10 percent of book profits to 15 percent of book profits for companies enjoying STP or Export Oriented Units (EOU) tax holidays.  The FM has sought to neutralise the adverse impact of this increase in rates of MAT by extending the period of availing credit for MAT paid from 7 years to 10 years.

The FM has also brought clarity on the tax holiday computation formula applicable to units located in Special Economic Zones (SEZ).  While, the earlier formula seemed to suggest that the tax holiday was restricted only to a proportion of export profits earned by the SEZ unit of a company which also operated other businesses, the new formula introduced in this Budget provides for a tax holiday on entire export profits of the SEZ unit.  However, since the amendment is applicable from financial year 2009-10 onwards, there is no clarity on the quantum of tax holiday for the prior years.

Roll back of FBT

The widely criticised FBT has been abolished in this Budget.  This change will not only reduce documentation and compliance requirements for Indian IT companies, but will also improve their competitiveness.

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