Budget Analysis 2009-10 : Digital and Telecom View
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The Annual National Budget is perhaps one of the most important documents discussed and approved by the Government. Just today, we discussed what the IT/Telecom sector could be looking to from the Budget. The budget presented by Finance Minister Pranab Mukherjee was, however, only mildly reassuring of future development and growth. The markets took a fall possibly due to expectations crashing. Details were also left out of this budget, with the finance minister leaving out respective sectors of interest like Telecom to the respective ministers. The overall tone of the budget was “aam-aadmi” oriented with a focus on inclusive growth and development.
We’ll take you through the relevant highlights of the budget that are pertinent to the sectors of Web, Advertising and Technology. Following that, we’ll take you through the details.
Going through the key features of the Budget:
- An aim to reach and sustain 9% growth which had earlier slipped to 6.7%
- A present acknowledgement of a fiscal deficit of 6.2%
- A focus to improve infrastructure and PPP (Public Private Partnership)
- Stimulus package for print media
- Benefits to exports (includes services like Software)
- Focus on Inclusive development and rural reforms (might include a specific allocation for telecommunication and access in rural sectors)
- UIADI (Unique Identification Authority of India) to setup an online data base.
- Centralised processing Centre (CPC) at Benagluru – moving towards E-Governance
- Implementation of GST by 1st April, 2010
- No changes in corporate taxation policy
- Fringe Benefit Tax eliminated
- Deduction fo 150% on expenditure incurred on in-house R&D
- MAT (Minimum Alternate Tax) increased to 15% of book profits from 10%.
- Tax disputes resolution Mechanism for international transactions
- Small Business with turnover < 40 lakhs, exempt from advance tax.
- Full exemption from 4% special CVD on parts for manufacture of mobile phones and accessories.
- CVD exemption on canned or packaged software.
The above were the relevant rules introduced. Below is an analysis of each policy and its implications.
An overview of the budget with specific relevance to the Telecom and IT Industry goes as follows. A look at the Economic Survey of India report on telecom reflects the importance of Telecom growth in the nation. It projects the importance of emerging technologies and regulation of 3G, 2G and relevant allocation of spetra for the same. It also talks of rural unification. It also acknowledged the importance of FDI (Foreign Direct Investment) and PPP (Public Private Partnerships) in the field of telecom. However, what was surprising was the shocking lack of mention of specific telecom news in the budget. However, that was in tune with the Ministers phlegmatic budget which lacked any flamboyance that is reminscent of a budget presentation.
However, a closer look at documents put up on the Indian Budget Website will show the amount expected to be allotted to respective departments. The Department of Telecom has been under our purview for its attempts to restructure and organise the growing telecom sector. Surprisingly, only 16.21 thousand crores has been allotted to the department, which accounts for 3.6% of total expenditure. It’s a surprising drop from last year’s allocation of 5.14%. The Department of Information Technology has been allocated 2,802 crores (0.625%), a decent increase from last year’s allocation of 0.443%.
(While reading the below points, please go through the relevant sections in the Finance Minister’s Speech for more information)
Point 11 and 19 : Acnkowledgement of the Global meltdown, focus towards exports, and stability and moving towards a 9% growth rate. Most IT companies lost out after the Subprime crisis and the following Global Economic Meltdown since most companies in the USA who were used to outsourcing stopped. So hopefully, impetus will be given to increase exports and services. India’s contribution as part of the BPO industry is quite high. He also focused on the importance of increasing FDI. FDI has so far been very relevant in the telecom industry. He mentioned boosts given to PPP (Public Private Partnerships). The implementation of IIFCL (India Infrastructure Finance Company Limited) (which invests over 13% in telecom growth) which will refinance 60% of all infrastructure projects. That, included with the Economic Survey analysis sets the tone for the importance of telecom in the forthcoming financial year. All further details were left to DoT.
Point 31 mentions the importance of giving impetus to Global Exports. The services provided by the BPO industry account for Software “Service” Exports. Point 31.e details out the benefits given to the Print Media sector. It’s a possible indication of the Finance Ministry understanding that current trends are fast moving towards TV and Digital Media. As of now, the Print Sector faces active competition from on-line sites, blogs, feed aggregators, and the upcoming threat of social-media platforms like Twitter is also eroding their customer base. Though digital media is expected to grow slowly in India, it obviously reflects a major threat to the print sector.
Point 64 talks about the UIDAI (Unique Identification Authority of India), headed by Nandan Nilekani. We had already blogged about it. The Finance Minister said that the first list of Unique IDs roll out in 12-18 months. He has allocated 120 crores for the same. The UIDAI is relevant to the IT sector, because it shows the growing dependence and progressive trend towards E-governance. It also indicates a major hand of the private sector in implementing Government policies.
Point 80 is another move towards technology and its implementation. For simplicity, tax retursn are to be filed online. On the direct tax side, a recent initiative for further improving efficiency is the setting up of a Centralized Processing Centre (CPC) at Bengaluru where all electronically filed returns, and paper returns filed in entire Karnataka, will be processed. This sort of e-technology dependence should further stimulate the IT Sector in India. Along with UIDAI and overall shift to web-based portals and the Government becoming more net-savvy, the IT sector should soon get a whole lot of business just from the Government.
Points 82, 83 introduce Corporate Tax Reform. As of now, Mobile Telecom service providers are plagued with dual taxation, an issue which is still being battled out in courts. Since some states tax them for providing goods (since SIM cards etc qualify for that) and the Centre taxing them for services (telecommunication), they had for long been hoping for a simplified direct and indirect taxation policy. Direct taxation was promised within the duration of 45 days. The GST (Goods and Services Tax) would be unveiled by the 1st of April 2010. The Finance Minsiter wisely mentioned that “Tax Reform was a process, and not an event”. GST would comprise of State GST and Central GST with different jurisdictory capacities and legislation. Hopefully, that should resolve some woes from the telecom industry.
Point 87 was relevant to all sectors, but more importantly the IT sector. However, the finance minister firmly put his foot down with no reduction in corporate taxes. He pointed out that various tax exemptions were already eating into the tax-base, and further reductions would only worsen the case.
Point 90 will prove to be useful to IT companies. The deductions under Section 10A and 10B were to be maintained only till 09-10. They have now been extended till 10-11 to provide benefit to the lagging export sectors. For more on how, the deduction benefits IT cos, check Nasscom page.
Addition: This should profit the developments of STPIs (Software Technology Parks of India)
Addition: In Point 91, the Finance Minister went on to abolish the Fringe Benefit Tax introduced by his predecessor. The FBT had received quite a few complaints from industry. What was not so obvious to many (including the author) was the fact that though employers won’t be charged FBT, employees will now be taxed on the perquisites earned (perks). The details, though not mentioned in the budget should be disclosed by the CBDT (Central Board for Direct Taxes), if they have not been already. Financial advisor, and authority on Taxes, Subash Lakhotia, said (on CNBC Tv18) that though it might seem that the FBT had not truly gone, in light of the news that employees would be taxed, it would ensure better facilities for employees. Earlier, he said, employers would cut down on basic play so as to compensate for FBT. Any stock allocation to employees will also be taxed under ESOPs (Employee Stock Option Plans). Please read up the relevant IT acts/circulars for more information.
Point 94 which increases MAT from 10 to 15% was brought about to resolve inequity in corporate taxation. However, the window period was extended from 7 years to 10 years. More about the MAT.
Point 96 highlighted the importance of BPO in India. The Indian Tech companies are often plagued with confrontations with the Taxation Bureau. Matters of conflict often delay deals with foreign agencies. A delay in international transactions reflects badly on the growing industry and on the nation as a whole. Hence, to resolve all delays, the Government granted the CBDT (Central Board of Direct Taxes) to formulate ’safe harbour’ rules and speedy expedition of matters related to transfer pricing disputes.
Point 101 is of special relevance to us. It talks of exemption from Advance Tax for Small Business owners (with an annual turnover of < 40 Lakh). All such taxpayers will have the option to declare their income from business at the rate of 8 per cent of their turnover and simultaneously enjoy exemption from the compliance burden of maintaining books of accounts. This new scheme will come into effect from the financial year 2010-11. Most Internet companies and small startups come into this category.
Point 109 continues the exemption of 4% CVD (Countervailing duty) made available to accessories, parts and components imported for the manufacture of mobile phones till the 30th of June, 2009 for one more year i.e till 10-11. This will make it easier to manafacture handsets in India and give some more impetus to the burgeoning telecom industry.
Point 124: To quote the Finance Minister, “The IT industry has pointed out that it is facing difficulties in the assessment of software which involves transfer of the right to use after the levy of service tax on IT software service. To resolve the matter, I propose to exempt the value attributable to the transfer of the right to use packaged software from excise duty and CVD.
Point 130 talks of tax reforms to exports, which might again benefit the BPO industry.
Hopefully, the reforms mentioned through the Finance Minister’s speech will come into effect and benefit the Indian Economy. Markets seem diffident (with the Sensex falling 869.65 points!) with most analysts heralding the budget to be “Safe and Status Quo”. However, like the minister pointed out, changes aren’t made overnight. He also left most policy details and sector specfic regulations to the respective ministers. The budget will now be discussed and debated in Parliament.
Additional comments : Though initially the response to the budget was very poor, as the day has progressed, more and more people have come forward stating that the budget, was, all in all, not very bad. Though there were little drastic changes, and no news on disinvestment (which many people were expectant to see), the FM in an interview on CNN IBN clearly stated that disinvestment would come in the long run as promised in the Presiden’t Speech on the opening day of Parliament. There were also comments about how the people expected too much of melodrama from the budget. Arvind Virmani, Chief Economic Advisor, stated that the 1991 budget had spoilt us and people were expecting too much from the budget. He said, that in due course of time, all relevant ministries would elaborate on reforms / changes.
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really nice analysis..I think the FM has kept disinvestment for later when the market goes up..nice thinking on his part!!