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Krishnan Thiagarajan

FOR the software industry, accustomed to being pampered in each Budget, the Budget for 2002-03 is likely to stand out like a sore thumb.

Although the software industry did not have any specific demands from the Government, it did seek clarifications through the Budget on several provisions contained in the Income Tax Act such as Section 10 A/ 10 B and Section 80 HHE.

For instance, the software industry wanted an insertion under Explanation 3 to Section 10A that profits derived from "onsite development" of computer software outside India should be deemed to be profits and gains from exports of software outside India. And that too, with retrospective effect.

Instead of expanding the ambit of Section 10A , the Finance Minister has chosen to spring a surprise on the software industry. The Finance Minister has proposed to restrict the 100 per cent deduction of export profits allowed to certain units (registered as EOU, EPZ or STP) under Section 10 A and 10B to a 90 per cent deduction for the assessment year 2003-04.

This effectively means that 10 per cent of the export profits are slated to be tax for all major software exporters from financial year 2002-03. At the corporate tax rates of 36.75 per cent for this year, the tax incidence may work out to around 3.675 per cent of export profits for frontline software companies availing exemption under Section 10 A/10 B.

As things today, in the absence of clarification on onsite exports, it may be reasonable to expect that both frontline and medium sized companies are claiming exemption under Section 10A/10B for only the offshore component of their overall export revenues.

In most frontline companies, the offshore-onsite worked out to approximately 50 per cent each from these two component of export revenues.

After accounting for 50 per cent of their offshore revenues under Section 10A/10B, companies are probably claiming the onsite portion (the remaining 50 per cent) of their export revenues as deduction under Section 80 HHE of the Income Tax Act.

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