Budget implications on IT industry

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Benefits under 80HHE have been partially withdrawn w.e.f. April 1, 2000.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:

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.