NASSCOM Reinforces its Post Budget Demands

by CXOtoday Staff    Mar 15, 2007

NASSCOM has formalized a part of its post budget statements it issued the media, into a post budget memorandum with proposed amendments’ dispatched to the finance ministry today.

It has suggested that the levy of MAT on Section 10A / 10B profits be deferred unless a decision to extend the tax holiday beyond 31-03-2009 is also taken simultaneously.

According to a press release, though companies in the IT / ITES sector are allowed deductions under Section 10A / 10B, many incur income tax in foreign jurisdictions. “The companies also are subject double levy of other taxes such as social security & insurance taxes, which are not available for tax credit in the absence of treaties. Thus, some companies in IT / ITES sector are already incurring a minimum tax much above the MAT rate of tax i.e. 11.33%. The introduction of MAT has come as a setback for these companies claiming deduction under Section 10A / Section 10B,” it noted.

The association opined that levy of MAT would also impact small and medium companies which do not have a visibility for sufficient profits in the near future to apply the provisions of Section 115JAA and claim credit of tax paid. It could be a final tax for such companies, it alleged.

“Even if MAT is viewed as a mere cash flow issue, it will make SMEs uncompetitive in global markets. Most investments in the past have been made under a presumption that there will not be any additional tax cash outgo. Levying a tax on Section 10A / 10B profits will upset the business competitiveness and viability,” it pointed out.

On venture capital funds, the association clarified that information technology relating to hardware and software development is considered as specified business.’ It said, “In commercial parlance, the business of information technology would include information technology enabled services (ITES). However, the scope of information technology business has been narrowed down to software development. Hence, it is apprehended that venture capital undertakings engaged in the business of ITES will not qualify for
exemption under Section 10(23FB).”

It added that many VC companies have staked large investments in ITES. The
restrictions imposed by the proposed amendment have raised concerns on
the viability of investments made. “It may be clarified that software development will include the business of ITES. More generally, since it is better to leave to professionals the judgement of which sectors are promising, it would be better to have a “negative list” to take care of any concerns of the government, rather than a “positive list” for venture funding.”

NASSCOM’s immediate reaction post budget on February 28, was “Unimpressed and Dismayed.”

In an official statement the industry association said, “NASSCOM is dismayed at the proposal to extend MAT on export incomes which are exempt under Sections 10A and 10B.”

Declaring this as “regressive” action that could shake investor confidence in India the association said, “This is a regressive step that withdraws government s commitment to provide tax incentives till 2009, on the basis of which companies have made their business plans and investment decisions. This could affect investor confidence and growth in this sector which is not only India s biggest exporter (US$31.6 billion in 2006-07) but is the biggest employer in the organized private sector.”

As a solution the association had recommended that the government immediately supplement the introduction of MAT with an extension of the STPI scheme (and Section 10A, 10B benefits) by 10 years. It claims that this is the “unanimous” suggestion of the IT industry.