Will Pranab babu do a Santa?

It's less than three weeks before the Union Finance Minister Pranab Mukherjee presents the Budget 2012. March 16, the day when, like every Indian, IT sector too would be glued to the television set to see if Pranab Mukherjee has anything new
to offer to the sector. The economy is going through a slow phase, the bureaucracy is in a state of paralysis and corporate India is suffering from a bout of depression. Given these fiscal and political constraints, can Mr FM raise to the occasion and manage to change the mood of the nation? Will he present an agenda for growth or a statement of accounts? As the industry and government are yet to adopt a firm agenda to address pain points such as fiscal and revenue deficits and declining growth rate, the industry yearns for radical reforms in taxation space.

CORPORATE TAX - (SURCHARGE + CESS)
At the time when companies want to invest every paisa of profit into innovation and expansion; increasing corporate tax seems to have the real barrier in growth. Even though government brought down surcharge to 5% from 7.5% in the last Budget, companies still feel its more than other emerging markets. eScan says having the current system of Corporate tax rate of 30% plus surcharge of 5% plus cess of 3%, results in effective tax rate of 32.45% for domestic companies and tax rate of 40% plus surcharge of 2% plus cess of 3%, results in effective tax rate of 42.024 for foreign companies which is significantly higher than other developing /developed countries. And, in addition to that dividend distribution tax and lowered depreciation rates impose a further strain on companies leading to increased outgo towards income taxes thus leaving inadequate funds for generation of internal resources for ploughing back for expansion, modernization, technology upgradation, R&D, etc. Now seeing its growing effect over years, companies say surcharge and cess on corporate tax must be abolished. Further, corporate tax rate should be brought down to 25% and tax rate applicable to foreign companies may also be realigned to provide level playing field and to facilitate better tax compliance and bring down cost of doing business in India.

SOFTWARE TAXATION ISSUE
The forthcoming budget may bring cheer to India's 10,000-crore information echnology industry as the finance ministry is keen to resolve ambiguities over taxation of software. Although, the finance ministry made several attempts in the past to clear the haze over software taxation, its moves have failed to satisfy the industry.

Confusion largely stems from the fact that software is sometimes treated as a good when sold on a compact disc, while it is considered a service when supplied via electronic download. This peculiar nature of software sometimes leads to double taxation, causing hardships not just to the industry but also to consumers. The issue of double taxation of software-imposition of service tax and countervailing duty-still exists for software packages sold with licenses. Harinder Salwan, secretary general,
ISODA says, "Seeing the problems from double taxation, we have submitted recommendation for lower TDS on the sale of software just in case the government wishes to maintain its status-quo on double taxation. We would appreciate if the government understands the basic difference of customized and packaged software and classify all packaged software as goods irrespective of the mode of delivery. We would also appreciate if countervailing duty (CVD) is removed from packaged software as there is no threat to local industry." The industry was allowed to split the license fee and cost of the CD for tax purposes as the cost of packaged software for institutional customers depended on the number of users. The latest notification, however, removed the provision of splitting. Yogesh Godbole, president, Computers and Media Dealers Association says, "Software Taxation should be uniform and Service Tax on the same should be removed."

GST
Goods and Services Tax (GST), a regime which could bring uniform taxation across India, was planned to be launched in October 2011. Now, industry expects government to reach in agreement with the state governments to launch it as soon as possible. Nalin R Patel, president, Association of IT Dealers (AIT) says, "In the upcoming budget, we expect GST to be implemented, as it will bring relief to the resellers' community. Government should re-consider the taxes and duty structure on IT products in India. This will help reduce the grey market presence in India as well as encourage local manufacturing." Speaking on the similar line, Hari Balasubramanian of COMPASS says, "Government needs to take steps to have proper administration of MRP." He says, "Collecting SAD on several items is required to be introduced in order to stop grey market sales where VAT is not charged which in turn creates problems for people who want to do genuine business by paying all taxes. AD refund process should be made easier." Adding to those points, Hari also feels Centre in agreement with state governments should bring clarity on Service Tax and VAT front. He says that Service Tax and VAT on paper license are very painful.

Raising similar kind of concerns, Yogesh Godbole of CMDA says, "The basic pain area is taxation and mandatory reporting. Channel has to file so many reports every month PF, ESI, VAT, TDS, Service Tax and many more." He says government need to make taxation process very simple as it could only be possible if GST would be implemented at earliest.

INDIGENOUS MANUFACTURING
Besides taxation issue IT sector seems to be very much affected by the low prominence given to IT related manufacturing segment in India. Puneet Singhal, president, Computer Media Dealers Association (CMDA) said, "Taxes and duties on IT products are alright, but the focus should be more on encouraging Indian manufactured products. Till now the Indian market is trading based and the margins are really squeezed up. Government should push IT manufacturing in India." Adding to that he also says it's not an overnight thing, but a majority of the IT products are imported and everyone from resellers to customers is losing out." Understanding the growing importance of manufacturing segment over the years, Yogesh Godbole, president of Computers and Media Dealers Association feels that unlike the other emerging markets India is yet to have the proper manufacturing base. He says, "Central Government should come out with policy for allotment of the special IT market zone/building/Area demarked where IT products can be sold. These markets will generate better revenues for IT Channel. Special economic zone with facility and subsidy in taxes for hardware manufacturing units will save be cheaper for Indian customers. More employment will be generated and exporting to other countries will create more currency." Resellers argue that if manufacturing is pushed then issues like parallel imports can be sorted out. Manufacturers Association of Information Technology (MAIT), which counts all major manufacturers like Lenovo, Dell, Intel, HP, HCL, Canon, Acer and Microsoft as its members, says that demands met in the forthcoming Budget will decide long-term profitability of the industry in India. Sabyasachi Patra, Executive Director of MAIT says, "With lower-than expected consumption of IT products whose import costs have gone up owing to the Thailand flood and rupee devaluation, we are now hoping for long-term investment-friendly policies to provide much needed drivers." According to Patra, MAIT has submitted its proposals to the Finance Minister. IT manufacturing sector is also asking for a continuation of the exemption from excise duty in locations like Pant Nagar in Uttarakahnd for the entire 10 years, since companies like Lenovo and HP have made investments on that premise. It also said that manufacturers invested in Jammu and Kashmir should be reimbursed 100% excise paid from March 27, 2008, the date on which the refund amount was reduced to 36%. Patra says, "Abrupt changes in government policies give a negative signal to foreign investors." Voicing prolocal manufacturing sentiments, B Hari, president, COMPASS, Kolkata said, "There have been some MRP issues and we want clarity on rationalization of taxes wherever possible. Taxation on software is also another area where we expect some changes. We do expect the government to push local manufacturing as our imports are coming higher.

The government should also give some sops to local manufacturing especially electronics and hardware industry. We also expect some clause of reservation on ethnic companies. Also, showing the another affect on manufacturing sector eScan says The rate of depreciation for general machinery and plant has been reduced in last Budget from 25% to 15%, along with the enhancement of initial depreciation rate from 15% to 20%. The increase in the initial depreciation has not gone far enough to neutralize the impact of decrease in normal depreciation. Suggesting the solution, company says with a view to allow industry to keep pace with rapidly improving technology, the deprecation rate on plant & machinery may be enhanced from 15 % to 25%.And it's not just distributors or channel partners even major companies too have similar kind of concerns.

Raising the voice on behalf of the sector, Som Mittal, president, Nasscom says that MST must be removed. "We have formed a great scheme called SEZ. Last year we introduced minimum alternate tax (MAT) on it, it gave a very wrong signal and I hope this year the finance minister will remove the MAT," he says. He adds, "It doesn't have an impact on the extra creditor and its cash flows because anyway it's adjusted over a period of 15 years but for us it's very important that MAT is removed as it signals a very strong message." Last year, Minimum Alternate Tax (MAT) of 18.5% on Special Economic Zone (SEZ) developers and units was imposed by the Finance Minister as a result of which there was a sharp deceleration in investments in SEZs.
In spite all the major issues, tax remains to be the major concern for most of the associations as well as channel partners. Prashant Naik of ACDA says, "We expect government to reduce custom/excise duty on hardware, reduce service tax and Vat on Software in up-coming Budget. Let's see if Pranab Da's ‘Budget Ka Pitara' brings smile on the faces of IT executives or it proves to another normal budget.