FEBRUARY 26, 2010

Finance Bill 2010 - Fall-out for IT Sector

By S Sivakumar, CA

INCOME TAX

1. The FM has reiterated that the Direct Tax Code (‘DTC') would be implemented from April 1, 2011. He has also stated that all attempts would be made to implement, from April 1, 2011.

2. There is no mention of the extension of the tax holiday under Sections 10A and 10B of the Income tax Act. Hence, it does look like, there would be no extension of the tax holiday for STP Units beyond March 31, 2011. As we know, the DTC does not talk of any tax holiday at all. Hence, for all practical purposes, it must be assumed that the tax holiday for STP Units would not be available beyond March 31, 2011. Apart from not extending the tax holiday, the Budget has also not dealt with some major irritants in Sections 10A and 10B, as also in the transfer pricing regulations.

3. There is no talk of any extension of the tax holiday to SEZ Units under Section 10AA, either, in the Budget. However, it is widely expected that the tax holiday for SEZ Units would be restored in some form or other under the DTC.

4. In the absence of clarity on the availability of tax holiday for SEZ Units under the DTC, STP Units, it would seem, have been left with no time to plan for devising strategies for tax planning, etc. vis-a-vis shifting to the SEZ scheme.

5. One non-so significant amendment relates to Section 10AA pertaining to SEZ Units . As we know, Section 10AA was inserted in the Income-tax Act by the Special Economic Zone Act, 2005 with effect from 10.2.2006.  Through the Finance (No.2) Act, 2009, section 10AA(7) of the Income-tax Act, 1961 was amended and the words “by the undertaking” were substituted for “by the assessee” with effect from assessment year 2010-11 and subsequent assessment years. This was done as the existing formula was perceived to be discriminatory in so far as those assessees are concerned who have multiple units in both the SEZ and the domestic tariff area (DTA) vis-à-vis those assessees who were having units in only the SEZ.  With a view to removing the anomaly, the provisions of sub-section (7) of section 10AA of the Income-tax Act were amended. In order to make the amendment effective for earlier years, it is proposed, by inserting a proviso to sub-section (7), to provide that the provision of sub-section (7), as amended by Finance Act 2009, will apply to the assessment year 2006-07 and subsequent assessment years.

6. MAT gets increased

One major bad news for STP and other IT Companies is that, MAT is proposed to be increased from 15% to 18% of the book profits. However, surcharge is being reduced from 10% to 7.5%. The effective MAT rate would now be 19.93% as against 16.99%. This increase would affect all STP Units which are claiming deduction under Sections 10A and 10B. There are no change in the provisions related to carry forward of the excess MAT paid.

7. Payments to Non-Residents

Section 9 of the Income tax Act is proposed to be amended to provide that for income to arise or accrue in India, the services by the Non-Resident need not be rendered in India. This amendment, which is being introduced retrospectively with effect from June 1, 2006, will practically cover most payments made by residents to Non-Residents. As per the new Explanation, the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not,

(a) the non-resident has a residence or place of business or business connection in India; or

(b) the non-resident has rendered services in India.

This Explanation is being introduced to get over the impact of the decision rendered by the Karnataka High Court in the Jindal Thermal Power case in which it had been held that the law laid down by the Supreme Court in the Ishikawajma Harima Heavy Industries case still holds, even after the amendment to Section 9, vide Finance Act, 2007.

One cannot appreciate the repeated attempts of the Government in trying to undermine the decisions of the Supreme Court and the latest amendment is a clear pointer to this.

It would now look like most payments to Non-Residents would now come under Section 195 of the Income tax Act.

8. Threshold Limits for TDS raised

The threshold limits for TDS are proposed to be increased, as follows, effective from July 1, 2010:

Non-remitting of TDS deducted would now attract an interest of 1.5% per month, up from the current interest rate of 1% per month.

9. Disallowance of expenditure on account of non-compliance with TDS provisions

The existing provisions of section 40(a)(ia) of Income-tax Act provide for the disallowance of expenditure like interest, commission, brokerage, professional fees, etc. if tax on such expenditure was not deducted, or after deduction was not paid during the previous year. However, in case the deduction of tax is made during the last month of the previous year, no disallowance is made if the tax is deposited on or before the due date of filing of return. It is proposed to amend the said section to provide that no disallowance will be made if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income specified in Section 139(1). This amendment is proposed to take effect retrospectively from 1st April, 2010 and will, accordingly, apply in relation to the assessment year 2010-11 and subsequent years.

Service Tax

10. Welcome Amendment to Export of Services Rules, 2005

In a major relief to services exporters, Rule 3(2)(i) is being deleted. This would mean that the requirement for the service to be provided from India and used outside India, is no longer valid. Hence, the only requirement for services to be exempted from the levy of service tax, under the Export of Services Rules is that, the payment should be received in convertible foreign exchange. In effect, all services which are paid for in convertible foreign exchange, will now be exempt under the Export of Services Rules. This is a highly welcome provision, which will go a long way in reducing litigation surrounding export of services.

11. The levy of service tax on Renting of Immovable Property services has been reaffirmed, through a retrospective amendment effective from June 1, 2007, holding that, ‘Renting' is a taxable service. This amendment is obviously intended to overcome the impact arising out of the decision of the Delhi High Court, in the Home Solutions case. With this amendment, all STP Units would be required to pay service tax to their landlords / lessors.

12. Sale/transfer of software for non-commercial use will also come under service tax

As we know, the Government had, thro' Notification No. 22/2009-CE provided exemption from levy of excise duty for packaged software or canned software falling under Chapter 85 of Central Excise Act, 1985, on that portion of value representing the consideration paid or payable for transfer of the right to use such goods. This exemption was subject to the condition that the transfer of right to use shall be for commercial exploitation including the right to reproduce, distribute and sell such software and the right to use the software components for the creation of and inclusion in other information technology software products. Now by virtue of Notification 17/2010-CE dated February 27, 2010, the condition that the transfer of right to use shall be for commercial exploitation is removed. The Notification 22/2009-CE consequently stands supeseded.

Now irrespective of whether the transfer of right to use is for commercial exploitation or not, the exemption from excise duty on the portion of value representing consideration paid or payable for transfer of right to use such goods, is available.
A similar change is effected for exemption from levy of CVD by superseding Notification 80/2009-Cus dated July 7, 2009 with Notification 31/2010-Cus dated February 27, 2010.

13. There are some provisions related to facilitation of refund of accumulated cenvat credit for exporters, in terms of the amendment to Notification 5/2006-CE (NT) dated 14-3-2006, which had been issued under Rule 5 of the Cenvat Credit Rules, 2004. One would need to wait and see if these would make any impact, in terms of the ground realities.

(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)