Why IT companies are giving a thumbs-up to the Budget

The overall IT sector would see these developments as positive and would benefit stocks like TCS, Infosys, Wipro etc.

The budget has provided clarity on buyback which is especially positive for cash rich IT companies that periodically return cash to shareholders.

The Budget proposes that all buybacks will now be taxed as capital gains, replacing the dividend‑like treatment introduced in 2024. To further disincentivise promoters from using buybacks to reduce tax liability, the budget has announced an additional buyback tax on promoters. The change will push the effective tax burden to 22 percent for corporate promoters and 30 percent for non‑corporate promoters.

The buyback overhaul builds on the rules notified from October 1, 2024, which had shifted the tax liability from companies to shareholders. Under those rules, the entire buyback amount was treated as dividend income in the hands of shareholders and taxed at slab rates.

A key provision that remains is the treatment of share acquisition cost. The cost of shares tendered in a buyback will continue to be treated as a capital loss, either short term or long term, depending on the holding period. Investors can set off these losses against other capital gains or carry them forward for up to eight years, providing some relief in the new system. For small shareholders, the shift to capital gains is expected to give clearer tax outcomes and reduce disputes over classification. For promoters, the additional levy aims to correct what the government views as an uneven tax advantage created by the old rules.

The other significant announcement pertains to safe harbour.  Safe Harbour rules in India are Income Tax regulations (Section 92CB) that allow taxpayers to adopt pre-defined transfer pricing margins for international transactions, reducing litigation and compliance burdens.

If an assessee opts for safe harbour and their declared price meets the prescribed margin/circumstances, the income-tax authorities will accept it, avoiding transfer pricing audits. Covered transactions include provision of software development services, IT-enabled services, Knowledge Process Outsourcing (KPO), loans to wholly-owned subsidiaries, corporate guarantees, contract R&D, and low-value intra-group services. These rules provide a safe, predetermined framework, allowing companies to avoid lengthy, complex audits.

The budget has clubbed multiple services under a single category of information technology services with a common safe harbour margin of 15.5%. Safe harbour threshold for IT services has been increased from Rs 300 crore to Rs 2,000 crore. Approval of safe harbour for IT services would be an automated rule-driven process and the budget has allowed continuation of safe harbour for a period of five years at the company’s choice.

The overall IT sector would see these developments as positive and would benefit stocks like TCS, Infosys, Wipro etc.

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