Budget 2010 presented an opportunity for the Finance Minister to emulate the act of Nelson Evora - the ace triple jumper from Portugal. The "hop" (extension of tax holiday benefit by a year in the interim budget) and the "skip" (no reference to the tax holiday benefits in the final budget making it a "virtual skip") were witnessed in Budgets of 2009. The Finance Minister could have taken a quantum "leap" in 2010 by incentivizing all Technology exporters (if not, at least SMEs) by extending tax holiday benefits. As it turns out, the heads of the Technology companies have more reasons to frown than cheer.
The biggest dampener in the current Budget is increase in the rate of Minimum Alternate Tax (MAT) from 15 percent to 18 percent. The progressive increase in MAT rates from zero in 2007 to 15 in 2009 had already strangulated the cash reserve position of several Technology companies. A further increase by 3 percent, without a corresponding extension of the tax holiday benefit would not only erode the cash position, but result in acceleration of the MAT credit set off, thereby hampering inorganic growth through acquisitions as well as expansion plans of Technology companies. With the impending implementation of the Direct Tax Code and absence of MAT credit carry forward in the draft Direct Tax Code, businesses would need to gear up to absorb possible sunk costs.
The increase in weighted deduction (from the existing to 150 percent to 200 percent) for in-house R&D units is a welcome move. Several companies both in the hardware as well as software space could consider re-locating their R&D centres to India. Where these R&D centres are part of an existing software development company, the increased weighted deduction could potentially be utilised to offset the higher tax outgo which companies would need to cough out post expiration of tax holiday. To further incentivise this sector, the Government can consider liberalizing certain parameters such as security of patented technology, periodicity of the agreement etc while according the approval for claim of weighted deduction under this section.
The retrospective amendment to Section 10AA of I-T Act was on expected lines. Large technology companies which have set up SEZ units prior to 2009 can now heave a sigh of relief. They can even consider writing back the provision towards litigation cost, given the protracted litigation that was expected given the ambiguity in the section. The commitment of the Government to continue the SEZ regime is encouraging and one hopes that necessary amendments to the Direct Tax Code would be carried to this effect before the same is tabled before the Parliament.
Source : The Economic Times