Budget implications on IT industry

By : |March 8, 2000 0

The Finance Minister recognised that the knowledge-based
industries are fast emerging as the front runners of the Indian economy with
Information Technology sector leading the current excitement. However, he
clarified that income is income and should be taxed.

The important budget implications on Information Technology
are listed hereunder:

Gradual withdrawal of 80HHE of Income Tax Act
Benefits under 80HHE have been partially withdrawn w.e.f. April 1, 2000. This
benefit would be completely phased out over a period of five years. The benefits
available under this section would be as under:

Sl.
No.
Financial
Year
Deductions
allowed
1 2000-2001 80%
2 2001-2002 60%
3 2002-2003 40%
4 2003-2004 20%
5 2004-2005 Nil
___________________________________________________________________________________________________________

Exporters however would continue to enjoy exemptions from MAT
till full phase out of the benefits under section 80 HHE of Income Tax Act.

Limitation of Benefits under section 10A of IT Act for
STPI/EPZ Units

Section 10A of the Income Tax act has been amended to allow benefits to such
STPI units commencing on or after the first day of April 1993 but before the
first day April 2000 and also restricting the availability of benefits to such
units till 31st March 2009.

The applicability of provisions under section 10A of Income
Tax Act will allow some of the IT biggies like Wipro, Infosys and Satyam
operating under STPI regime to continue in the tax free regime for some more
years.

As per the amendment all STPI units commencing prior to the
first day of April 2000 would enjoy a tax holiday till 31st March 2009. This
benefits under section 10A shall however not repeat not be available.

  1. To such STPI units formed by the splitting up, or the reconstruction, of a
    business already in existence.
  2. On onsite services provided at client’s site abroad which cannot be related
    to development of software being a product of the STPI unit.

Promotion of venture capital culture
A new regime for venture capital funds is to be introduced.
SEBI will be the single point nodal agency for registration and regulation of
both domestic and overseas venture capital funds. The tax laws and SEBI
guidelines are being formulated. No approval of venture capital funds by tax
authorities would be required. The principle of "pass through" would
be applied in tax treatment of venture capital funds, whose income would be free
of tax except when not distributed within the period that may be prescribed in
the guidelines of SEBI. Income in the hands of its investors, which would
otherwise be taxable, would also be kept tax free, and there would only be a one
time payment of tax by the venture capital fund at the rate of 20% when the fund
distributes its income to the investors. The same rate would apply to
undistributed incomes also.

Service tax on computer software
Services provided to any person by a consulting engineer in
relation to computer software continues to remain exempt from the purview of
"Service Tax".

The Finance Minister is however is setting up an expert group
to review all aspects of the Service Tax regime especially in view of some
recommendations to make it applicable across the board to all services.

Corporate Tax 

  • Rate of corporate tax for domestic companies remain unaltered at 35% and
    foreign companies at 48%. Surcharge of 10% would continue to be applicable
    only to Domestic Companies raising the level of corporate tax from 35% to
    38.5%.
  • The various exemptions currently available while calculating the Minimum
    Alternate Tax (MAT) have been withdrawn and the minimum alternate will be
    levied at the revised rate of 7.5% instead of the existing effective rate
    10.5%. This will bring all zero tax companies within the tax net. However
    export profits under 80HHC and 80HHE remain exempt from the purview of MAT.
    Exempt income of STPI/EOU/EHTP/EPZ units under section 10(A) and 10(B) will
    also continue to be exempt from the purview of MAT.
  • The rate of tax on dividends distributed by domestic companies has been
    increased from present level of 10% to 20%. Dividend income in hands of
    share holders continue to remain tax free and as in the past companies
    paying dividend will have to pay this tax at the enhanced rate of 20%.

Portfolio Investment
The policy relating to portfolio investment has been amended
allowing Foreign Institutional Investors (FII) to invest up to an aggregate of
40% equity shares of a company. Currently FIIs are permitted to invest in a
company, up to an aggregate of 24% of equity shares, which can be increased to
30% subject to approval of Board of Directors and a special resolution of the
general body of the company.

With this the foreign Institutional Investors would be in a
position to take bigger positions in the stocks of Indian Companies especially
in the IT sector.

Individual Tax

  • The existing slab rates of personal Income Tax remain unaltered at 10%,
    20% and 30%. However the surcharge of 10% imposed last year on tax payers
    having total taxable income of Rs. 60,000/- or more (for only one year)
    shall continue. This surcharge has been increased from 10% to 15% for tax
    payers having a total taxable income of above Rs. 1,50,000/- per year. This
    would therefore increase the tax burden on such assessees from present 33%
    to 34.5%.
  •  Fair sex is being pampered as usual. An additional tax rebate of Rs.
    5000/- is being allowed for women tax payers from their tax liability.

Interest rate on general provident fund
The interest rate on General Provident Fund has been reduced
from the present level of 12% to 11%.

The reduction of interest rates on provident fund will curb
expenditure and indicates a reduction in the interest rates in the time to come.

ESOP
The policy provisions with regard to applicability of Income
Tax on ESOP remain unaltered. Stock options will be taxed as a perquisite at the
time of exercise of the option by the employee. The difference between the
market value of the stock and the cost at which it is being offered to the
employee shall be the perquisite value. Further in event of sale by the employee
the difference between the sale consideration and market value on the date of
exercise of the option would be taxed as a capital gain.

The long pending demand of the Industry of taxation of ESOP
only at the time of sale has not been accepted.

Excise

  • Excise on software remain unaltered at NIL duty.
  • Excise on computer systems and peripherals remain
    unaltered at 16%.

Customs

  • Surcharge equivalent to 10% of the basic duty introduced last year remains
    unaltered and would be imposed across the board except on certain items like
    computer software.
  • Special Additional duty (SAD) of customs continues unaltered at 4%. This
    would now be applicable in case of import being made for trading. This would
    however remain exempt in cases where the basic as well as additional duty is
    exempt.
  •  Custom duty on import of software remains unaltered at NIL duty.
  •  Customs duty on import of computer systems under EPCG scheme continue to
    be at NIL duty.
  •  Basic custom duty on import of the following items
    • Computer systems reduced from 20% to 15%.
    • Mother boards reduced from 20% to 15%.
    • Floppy diskettes reduced from 20% to 15%.
    • Microprocessors for computers from 5% to NIL.
    • Memory storage devices from 5% to NIL.
    • CD ROMS from 5% to NIL.
    • Integrated circuits and micro assemblies from 5% to NIL.

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