The IT sector is looking forward to greater ease of doing business with the latest budget proposals

The latest Union Budget includes a slew of measures to improve business conditions for companies involved in the export of software and IT services. The proposed amendments in the Union Budget for Financial Year 27 regarding the safe harbor clause on transfer pricing are expected to help companies with cross-border business models.The government has proposed combining multiple IT service lines into one category with a common safe harbor margin of 15.5% for transactions up to Rs 2,000 crore. Safe harbor rules have been introduced to facilitate the taxability of foreign income. Earlier, these rules allowed companies to declare operating margins depending on the nature of services, generally ranging between 17% and 24% for foreign revenues up to Rs 300 crore. The latest proposal raises the income limit and sets a uniform operating margin, increasing the participation of more mid-market companies, which typically operate at lower margins than the top companies.

The other proposal on the treatment of profits from share buybacks will impact IT companies as they have often used this route in the past to return money to shareholders. The latest proposal treats profits from buyback activities as capital gains, compared to the previous treatment as deemed dividends, which were taxed at the marginal tax rate.

The latest change is expected to make buybacks more attractive as the tax outgo becomes more predictable as it will attract a flat capital gains tax. Moreover, business promoters will face an effective tax rate of 22%, while non-business promoters will face a tax rate of 30%.

The government has also proposed to grant a 20-year tax exemption until 2047 to foreign cloud service providers using Indian data centers. This is expected to benefit companies like Tata Consultancy Services and the Adani group, which have drawn up plans to set up data center operations in India.