Budget analysis: The IT and ITeS sector

One of the expectations of the Information Technology ("IT") industry from the Budget was the extension of the tax holiday under section 10A for STP units. In addition to this, the IT sector was also expecting some changes on the transfer pricing and dispute resolution front to reduce the ongoing litigation. On the indirect tax side, the industry was expecting significant relaxations/changes on the scheme for service tax refunds.

The expectation for the extension of the tax holiday for STP units has been turned down and moreover, the contentious provisions in the draft Direct Taxes Code ("DTC") seeking to levy Minimum Alternate Tax ("MAT") on Special Economic Zone ("SEZ") units have also been fast forwarded. On CENVAT credit rules, the scope of input services has been narrowed down thereby resulting in additional service tax costs on certain exclusions. On the policy front, while the Budget 2011 lacks any specific policy measure impacting the IT sector, the thrust of the government on e-governance and use of IT in tax and policy administration is evident and will go a long way in stimulating the domestic IT sector. For complete report, read attachment.

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