Part I – Budget Analysis (Basic sops and their term impacts)

This is the Part I of the five-part series on the budget 2009 evaluation. This part will focus on Basic sops and their term impacts. I have analyzed some of the provisions in the budget for Hi-Tech industry and possible effects based on my understanding of its working.

The finance minister has extended tax sops for IT exporters by one year under Sections 10A and 10B of the IT Act. This is a temporary measure at the best as it does not encourage new companies to set shop given the 1-yr time-frame only. This will only aid existing companies to weather the global downturn without having to worry about the tax overload on their margins. So this maneuver lacks a strategic vision.

By correcting an anomaly in Section 10AA that affected the tax benefits of companies in Special Economic Zones (SEZs), FM has enabled current companies to extract benefits of expanding operations. Most of the initial SEZs were setup with limited expansion capacities. With the growth in IT sector, companies were forced to grow outside the physical bounds of SEZ. Unfortunately, they were not able to take full benefit of expansion as their operations outside SEZ were taxable. Current measure can help them by making them more cost effective to gather more business and also expand further.

Currently, there are more than 6,000 software units under the Software Technology Parks of India (STPI) scheme. They account for about 85-90 per cent of India’s $47 Billion software exports, making them nearly $42 Billion in FY09. The current downturn has brought them down to about $37 Billion (estimated).

By removing multiple taxation on packaged software government is taking some steps towards checking piracy by bringing down the cost of s/w products. Indian IT companies need to move towards s/w product offerings from highly service oriented entities. More products for Indian businesses will improve the software consumption and open up avenues for innovation targeted towards benefiting the Indian consumers. This will enable Indian IT industry to move up the value chain and help preserve high-tech jobs within the country.

The measure to relieve employers from paying fringe benefit tax transfers this entire burden from the employer to the employees. So, for the government it earns them a few brownie points from the organizations while at the same time earning them higher returns. This is because employees will be taxed at a much higher rate than the corporate tax was being levied at. This measure, thus dampens the Income Tax benefits from removal of 10% surcharge on individual taxpayers. Is this government’s way of Corporate appeasement at the cost of individual employees?

-Anirudh

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2 Replies to “Part I – Budget Analysis (Basic sops and their term impacts)”

  1. Hi Anirudh,

    When you say that the burden of FBT has moved from employer to employee, you are assuming that the entire expense that is presently taxed under FBT will be treated as perquisite in the hands of the employees. That may not be the case. Expenses incurred for delivering the official responsibilities need not be taxed as perquisite. In effect not every expense will qualify for perquisite tax.

    Thanks
    Vishnu

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