HIGHLIGHTS OF THE BUDGET, AS PASSED BY THE PARLIAMENT, VIS-A-VIS INFORMATION TECHNOLOGY SECTOR
- The 100% tax exemption available to 100% Export Oriented Units operating under the Software Technology Parks Scheme, under Section 10B of the Income tax Act, 1961, has been extended till March 31, 2010, i.e. for the financial year ending March 31, 2010. Though the Budget proposals as tabled in the Parliament had not talked about the extension of the tax holiday beyond March 31, 2009 (the originally scheduled date of expiry of the tax holiday), the amendment to extend the tax holiday till March 31, 2009 had been incorporated in the supplementary provisions. Hence, STP Units are entitled to the tax holiday till the financial year 2009-2010.
- Service tax has been imposed on the ‘Information Technology’ service with effect from May 16, 2008. ‘Information Technology’ service is defined as follows:
‘Information Technology (IT) Software Service’ includes
- Development (study, analysis, design and programming) of software.
- Adaptation, up-gradation, enhancement, implementation and other similar services in relation to IT software.
- Provision of advice and assistance on matters related to IT software, including:
- Conducting feasibility studies on the implementation of a system,
- Providing specifications for a database design,
- Providing guidance and assistance during the start-up phase of a new system,
- Providing specifications to secure a database,
- Providing advice on proprietary IT software.
- Acquiring the right to use,-
- IT software for commercial exploitation including right to reproduce, distribute and sell,
- software components for the creation of and inclusion in other IT software products,
- IT software supplied electronically.
The Finance Ministry’s clarification on the introduction of service tax on the Information Technology Software Service runs as follows: “Software consists of carrier medium such as CD, Floppy and coded data. Softwares are categorized as “normal software” and “specific software”. Normalised software is mass market product generally available in packaged form off the shelf in retail outlets. Specific software is tailored to the specific requirement of the customer and is known as customized software. Packaged software sold off the shelf, being treated as goods”.
In our opinion, this is an inclusive definition which will cover virtually all activities related to the software services sector. As per the definition, ‘Information Technology Software Service’ includes the right to use IT software, which incidentally, is already covered under the VAT law. Hence, there is very likely to be a conflict between service tax and VAT on the right to use IT software which would include licensing of software products. Almost all of the activities of the software sector will have to fall under the sale logic involving payment of VAT or under the services logic involving payment of service tax.
3. Increase in the excise duty applicable on branded / packaged software from 8% to 12%.
- The excise duty on branded / packaged software has been increased from 8% to 12%, with effect from March 1, 2008, vide Notification No. 12/2008. All ‘off the-shelf’ software packages are considered as ‘packaged software’ which are considered ‘goods’ for purposes of levy of excise duty and Value Added Tax. In addition to the excise duty @ 12%, VAT would be applicable @ 4% on sale of branded / packaged software, as per the provisions of the Karnataka Value Added Tax Act, 2003 (a similar VAT rate is applied in respect of most of the other States).
- No service tax is applicable in respect of sale of branded / packaged software. Similarly, no VAT or sales tax is applicable in the case of customized software services.
4. Changes related to Fringe Benefit Tax
- Apart from the ‘meal vouchers’ issued by SODEXHO, ACCOR etc. being exempted from FBT, payments by corporates thro’ non-transferable pre-paid electronic meal cards usable only at eating joints or outlets, subject to fulfilment of conditions to be prescribed by the Central Board of Direct Taxes would also be exempted from FBT.
- THE FBT related provisions are being amended to provide that the following payments shall not be considered for FBT levy, viz.
- Payment which fulfils any statutory obligation
- Payment which mitigates occupational hazards
- Providing first aid facilities
- Providing creche facility for the children of employees
- Sponsoring a sportsman, being an employee
- Organizing sports events for employees
Given the wide reach of FBT, we would strongly advise our clients to take care of whatever exemptions that have been specified. For instance, it’s a common practice for IT companies to take their employees out, for picnics / get-togethers. They are advised to have some sports event (including tug-of-war games, in a lighter vein) based on which they can avail of the aforesaid exemption.
- The FBT rate on Festival Celebrations has been reduced from 50% to 20%.
- It has been clarified that maintenance of any accommodation in the nature of a guest house other than accommodation used for training purposes, would be exempted from FBT.
- Levy of FBT on ESOPs, introduced in the 2007-08 Budget, continues. FBT on other items also continues.
5. Refund of Input Service Tax / Cenvat Credit for Software Exporters
- In a major development, the Government has clarified vide Circular No. 868 dated May 9, 2008 that ‘exported services’ are not to be considered as ‘exempted services. This clarification greatly simplifies the procedure involved for software exporters including STPs to claim a refund of the input service tax paid or cenvat credit availed by them
6. Issues related to Income tax & service tax
- The Income tax returns and Fringe Benefit tax returns would now have to be filed on or before September 30, 2008 in respect of 2007-08, INSTEAD of on or before October 31, 2008. A similar procedure would have to be followed for the coming years, as well.
- All IT corporates would now need to plan their closure of accounts, audit and the filing of the Income tax returns in a more effective manner.
- There are no changes in the corporate income tax rates, surcharge rates, education cess rates and TDS rates.
- Weighted deduction of 125% is now available to payments made to companies engaged in research and development.
- Banking Cash Transaction Tax (BCTT) is withdrawn.
- A Parent company is now allowed to set off dividend received from its subsidiary company against the dividend distributed by the parent company, for purposes of payment of Dividend Distribution tax. This is a good move which will eliminate double taxation of the same element of dividends. There is no change in the position that dividends are exempt in the hands of the shareholders.
- Section 40A(3) of the Income tax Act – disallowance for cash payments is now being modified to cover all transactions within a day to the same party, upto an amount of Rs 20,000/- .
- Amount of deferred tax and the provision thereof and interest charged under the Income-tax Act will now be added to the net profit to find out the ‘book profit’ for levy of Minimum Alternate Tax, with retrospective effect from the assessment year 2001-02.
- Section 35D which provides for deduction of certain specified preliminary expenses for the manufacturing sector has now been extended to the service sector also.
- TDS certificates in the physical format will continue till March 31, 2010.
- The initial / threshold exemption limit for service tax payers has been increased from Rs 8 lakhs to Rs 10 lakhs. Consequently, it becomes compulsory for a service provider to obtain registration, if the value of taxable services provided by him exceeds Rs 9 lakhs.
- The Central Board of Direct Taxes has clarified that no tax would need to be deducted by the tenants on the element of the service tax involved, vis-`-vis the rents paid by the tenants to the landlords, under Section 194I of the Income tax Act, 1961.
- Software companies which have not obtained a registration certificate from the Service Tax Department are strongly advised to obtain such registration by immediately applying in Form ST-1.
7. Changes in the personal taxation front
- The threshold limit of exemption raised. In the case of all assessees, from Rs. 110,000 to Rs. 150,000. In the case of women assessees, from Rs.145,000 to Rs. 180,000 and in the case of senior citizen, from Rs. 195,000 to Rs. 225,000; The four slabs and rates will be as follows : Up to Rs. 150,000 Nil; Rs.150,001 to Rs. 300,000 10 per cent; Rs. 300,001 to Rs. 500,000 20 per cent; Rs. 500,001and above 30 per cent.
- The Senior Citizens Savings Scheme, 2004 andthe Post Office Time Deposit Account added to the basket of saving instruments under Section 80-C.
- Additional deduction of Rs. 15,000 under section 80D to a individual who pays medical insurance premium for his/her parent or parents.
- The rate of tax on short term capital gains under Section 111A and Section 115AD raised to 15% from 10%.
- For the sake of easier understanding, we have compiled a table showing the pre and post Budget income tax liability for individuals.
Contrary to the dismal outlook for IT corporates vis-`-vis this Budget, there is a lot of good news for employees on the personal taxation front. These are briefly summarized below:
8. Notes : Male employees having taxable income of Rs. 3,00,00/- will gain about Rs 24,000/- in taxes, while those having taxable income of Rs. 5,00,00/- get benefit of Rs. 44,000/- Female ass having Income of Rs. 3,00,00/- will gain Rs. 23,500/- in taxes, while those having taxable income of Rs. 5,00,00/- will save Rs. 43,500/- in taxes.
DISCLAIMER : This Report has been prepared based on the proposals contained in the Budget 2008-09 documents and papers. As such, S3 Solutions Pvt Ltd takes no responsibility for any inaccuracy which might have crept in, in this Note. This Note will need to be modified on the basis of the Finance Bill 2008-09, as and when it gets passed by the Parliament.