Software sector hails tax holiday extension

Monday, July 6, 2009

BANGALORE/HYDERABAD - India’s software sector Monday welcomed the extension of tax holiday on export profits to 2010-11 from this fiscal, rationalisation of multiplicity of taxes on packaged software and abolition of fringe benefit tax (FBT) but felt that the increase in minimum alternate tax (MAT) would have adverse impact.

According to the National Association of Software and Services Companies (Nasscom), the industry’s lobby, the budget had recognised the contribution of the IT-BPO (information technology and business process outsourcing) industry to the country’s economic progress and had provided measures to boost it.

“The finance minister’s decision to extend fiscal benefits available to the industry under section 10A/10B for one year will help the industry mitigate the impact of the current economic environment and help India retain its competitiveness,” Nasscom president Som Mittal said in a statement.

In his budget speech, Finance Minister Pranab Mukherjee proposed to extend the sunset clauses for tax holidays under sections 10A and 10B of the Income Tax Act, 1961, by one more year to 2010-11 to tide over the slowdown in exports.

Though the 10-year tax holiday expired by the end of fiscal 2008-09, former finance minister P. Chidambaram extended the benefit to this fiscal in his budget proposals for fiscal 2008-09.

B.V.R. Mohan Reddy, chairman Confederation of Indian Industry (CII), southern region, said the extension was a welcome step but felt that it should have been done for two years.

“The companies can’t do planning in one year,” said Reddy, who is also the chairman and managing director of Infotech Enterprises. Vinay Deshpande, who heads the IT committee of the Confederation of Indian Industry (CII), Karnataka chapter, said small and medium enterprises (SMEs) in the IT industry would benefit by the tax holiday.

However, Infosys Technologies chief executive S. Gopalakrishnan said the extension of 10A/10B for the IT industry was more emotional than of actual benefit, as most software technology parks, including export-oriented firms, would have come out of the tax holidays anyway.

“At the same time, the government’s focus on IT investment for enhanced governance is encouraging. The move to increase investment in higher education, especially in the IITs and NITs, will greatly benefit the industry in the medium and long term,” Gopalakrishnan said.

The IT sector also welcomed the rationalisation of multiplicity of taxes on packaged software. ?There was tremendous amount confusion about software products, excise duties leviable on them and service charges etc. There is some clarity on it in the budget. The finance minister has done well in removing some of the pinpricks for the industry,” said Mohan Reddy.

Hyderabad Software Exporters Association (HYSEA), however, felt that increase in MAT from 10 to 15 percent would have an adverse impact on the industry.

“Steps like the increase in MAT from 10 to 15 percent are going to have an adverse impact on the industry in the short run and this is something we could have avoided,? said HYSEA president M. Narsimha Rao.

Nasscom chairman Pramod Bhasin said the IT-BPO industry would play a key role in many of the budget initiatives aimed at promoting inclusive growth and creating substantial job opportunities.

“The industry will be keen to partner with the government in expanding e-governance initiatives, including modernisation of employment exchanges, the unique identification card project and smart cards for healthcare services so as to achieve enhanced governance,” Bhasin, who is also the chief executive of the leading BPO firm Genpact, said.

“Increased capital outlays on the education and infrastructure sector will also address growth challenges that the country has faced,” Bhasin noted.

Nasscom thanked the government for addressing some of the industry’s concerns relating to multiplicity of taxes on packaged software, creating a dispute resolution mechanism on transfer pricing, abolishing fringe benefit tax (FBT) and issues on service tax refund.

“The combined effect of these proposals will facilitate the industry and its two-million workforce to compete effectively and sustain India’s advantage,” Mittal said.

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