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Tax on fringe benefits worries IT sector
Though the IT firms are relieved to learn there has been no change in the status of section 10A/10B of the IT Act, the 30% tax on fringe benefits has come as a bolt from the blue.
A budget proposal to tax perks and fringe benefits of companies has rattled an otherwise upbeat IT sector in India's Silicon Valley.
Though the booming software firms are relieved to learn there has been no change in the status of section 10A/10B of the IT Act, which exempts them from paying taxes on export turnover, the 30 per cent tax on fringe benefits has come as a bolt from the blue.
Infosys chief financial officer (CFO) TV Mohanas Pai said on Monday: "Tax on fringe benefits is interesting but remains to be defined. Though the proposal exempts expenses incurred on conveyance and canteen allowances, it is not clear what can be construed as fringe benefits extended to employees collectively.
"We need to get a clarification on this from the Government."
Admitting that the proposal was worrisome to all companies and particularly to IT firms, which spend considerably on employee welfare, Mphasis CFO Ravi Ramu said the proposal needed to be examined in detail.
"It is not clear what are the other fringe benefits given in kind. The proposal needs to be examined in fine print. As an IT firm, we provide transport and canteen facilities to our employees, who work on shifts.
"We have to find out whether perks given to employees are considered as fringe benefits since they are given individually and not collectively," Ramu said.
A top Wipro official also expressed relief that the Budget had maintained the status quo on sections 10A/10B of the IT Act and continued the benefit of tax exemption on software exports.
Under these sections, export turnover excludes forex expenses incurred on technical services provided outside India.
The IT department, however, clubs together all forex expenses, including allowances given to employees at client sites, denying companies exemption on profits from exports.
Terming the Union Budget for the next fiscal (2005-06) as positive and in the right direction, Pai said reduction in corporate tax and personal taxes were long overdue.
"However, the absence of reduction in excise duty in many sectors is disappointing, though changes in social spending is welcome," he said.
"On the IT front, cuts in customs duties on hardware goods were along expected lines and would give a fillip to the sale of computers and electronic goods," Pai added.
Welcoming the five per cent reduction in corporate tax and modifications in personal taxes to boost savings, Ramu said the proposals would benefit companies as well as individuals.
"On the whole, the Budget proposals are encouraging, ensuring stability, continuity and growth. But there is no mention on allowing FDI (foreign direct investment) in infrastructure, though it was anticipated keeping in view the winds of change," he said.
The IT industry, however, welcomed the finance minister's proposal to set up special purpose vehicles (SPVs) with a corpus of Rs 100 billion, which will enable banks and financial institutions to lend funds to infrastructure projects in mega cities like Bangalore.
"Apart from the Bangalore international airport project, several infrastructure projects such as roads, drinking water supply, power, housing and urban development will benefit from the SPVs," Ramu said.
Similarly, funds for the proposed Bangalore metro project from the corpus of Rs 50 billion will ease the transport and traffic problems in the IT capital of India, he added.
