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Analyst Comment
Budget 2009-10: A ray of hope
Hari Rajagopalachari, Executive Director and Pradyumna
Sahu Associate Director, Pricewaterhouse-Coopers analyze the impact of the
Union Budget 2009-10 on India’s IT industry
Like every other industry, the IT/ITES industry had its own wish list for the
Union Budget 2009-10. We have highlighted some provisions in the budget and
its impact on the IT/ITES sector.
The extension of STPI benefits for another year comes as a relief for IT/ITES
companies especially for smaller ones. They will continue to pay lower tax until
FY’10-11 However, it was widely expected that there would be a 3-year extension
by which time the global economic situation should hopefully have improved.
On the Minimum Alternate Tax (MAT) front, while the expectation was for the
removal of MAT for STPI/EOU units to bring them on par with units within an
SEZ, MAT has actually been increased from 10% to 15% increasing the effective
tax rate from 11.33% to around 17%. The good part is that the carry forward
of MAT credit has been extended from 7 to 10 years. However, the increased rate
could lead to further cash flow issues for the companies since they may have
to upfront the tax and would be able to get relief only in the future, which
is not so welcome in these difficult times.
The abolition of FBT was a long-standing demand and the government has delivered
on this. FBT has been abolished; fringe benefits or perquisites would now taxable
in the employee’s hand. The removal of FBT could marginally improve the
net margin of companies in case of the same (i.e. the FBT paid by the company)
has not been recovered from the employee. It would reduce the compliance burden,
which is critical for an industry where overseas travel and onsite stays are
the norm.
ESOP as a tool to retain and motivate employees was losing its significance,
because of the above; FBT on ESOPs has also been removed. The benefit accruing
on ESOPs will now be taxable upon exercise of the option by the employee.
Another area that affects the industry is Transfer Pricing where there was a
hope for the introduction of advance pricing mechanism to mitigate litigation
on transfer pricing adjustments. The government has responded partially by introducing
an alternate dispute resolution mechanism for foreign companies and for transfer
pricing adjustments. This would lessen the woes of IT/ITES companies to some
extent. Another positive move is to exempt the value attributable to the transfer
of the right to use packaged software from excise duty and CVD. Nevertheless,
the larger demand that has been left out is that the classification of characterization
of packaged software should not be considered as a ‘service’ eligible
to service tax.
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Exercise price |
Vesting Date Price |
Exercise Date Price |
FBT/ Perquisite tax |
If share is sold on exercise date |
| Existing |
100 |
125 |
120 |
on Rs. 25 |
FBT paid on Rs. 25 |
| Proposed |
100 |
NA |
120 |
on Rs. 20 |
Perquisite value would be considered as Rs. 20 and
the employee would be required to pay tax at the applicable rate on such
amount. Further, since the cost of the shares would be considered at Rs
120 there would no capital gains/loss accruing to the employee |
| Existing |
100 |
125 |
150 |
on Rs. 25 |
FBT would be payable on Rs. 25 and short term capital
gains tax paid on Rs. 25 |
| Proposed |
100 |
NA |
150 |
on Rs. 50 |
Perquisite value would be Rs. 50 on which the employee
would be required to pay the tax at the applicable rate. Further, since
the cost of the shares would be considered at Rs 150 there would no capital
gains/loss accruing to the employee |
There were hopes that the government would announce measures that would help
improve our long-term country competitiveness in IT/ITES and at the same time
give a boost to domestic IT consumption. It was expected that there would be
provisions for improving employability of our engineering graduates and create
a greater push for PC penetration. While these have not been addressed directly,
the government has made a few laudable moves. The increase in allocation for
Mission in Education through ICT, the hike in outlay for IITs and NITs and provisions
for creating a central university in each uncovered state would continue the
process of strengthening our education system During a global economic meltdown,
support from all quarters would be welcome by the industry, which contributes
to close to 6% of our GDP. Nevertheless, the short-term measures will definitely
provide much-needed support to some extent in these times.
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