1. The budget proposes to increase the MAT limit from 15% to 18%.
2. The budget proposes to reduce surcharge on domestic companies to 7.5% from 10%.

The budget proposes to give the effect of the clarification given in the Finance Act 2009 on the issue of dividing the 'export turnover of the unit' by the turnover of the business w.r.t. sub-section (7) of Section 10AA should be made effective retrospective from April 1, 2006.

3. The budget proposes to increase the MAT limit from 15% to 18%.

1. The budget proposes to increase the MAT limit from 15% to 18%.


Impact: The increase in MAT rate from 15% to 18% in effective terms to 19.93% from 16.995% would mean higher cash outgo as the companies would now have to pay tax at 19.93%. However, the Companies would get MAT credit on the amount paid for the next 10 years and benefit of which would be taken when the Company starts paying tax on income tax profit rather than book profits. The Company would create a deferred tax asset for the MAT paid.

The provisions would have an impact on the Software, Telecom, Pharmaceutical, Power and Infrastructure Companies. The other companies are Sterlite Industries, Hindustan Zinc and Jindal Steel & Power (due to power subsidiaries).

2. The budget proposes to reduce surcharge on domestic companies to 7.5% from 10%.

Impact: The reduction in surcharge would lead to lower tax outgo for domestic IT companies.

3. The budget proposes to give the effect of the clarification given in the Finance Act 2009 on the issue of dividing the 'export turnover of the unit' by the turnover of the business w.r.t. sub-section (7) of Section 10AA should be made effective retrospective from April 1, 2006.

Impact: The budget has given effect to the clarification with regards to calculation of SEZ profits, which would clear the cloud in this matter. This would see write back of taxation for SEZ companies w.e.f. April 1, 2006.

4. The budget proposes to increase the weighted deduction to 200% from 150% of the expenditure (not being expenditure in the nature of cost of any land or building) incurred on scientific research on an approved in-house research and development facility under section 35(2AB). Further any sum paid to an approved scientific research association that has the object of undertaking scientific research or to an approved university, college or other institution to be used for scientific research, the weighted deduction has been increased to 175% up from Rs 125%.

Impact: The increase in weighted deduction would be beneficial to pharmaceutical companies as all have in-house research and also to standalone pharmaceutical R&D companies. Pharma companies spend about 5-8% on R&D.

The changes in direct taxes including hike in surcharge on corporate tax, increase in weighted deduction on in-house Research & Development from 150% to 200% etc will be beneficial. But there will be negative impact on companies paying MAT, as MAT has been increased from 15% to 18%. Overall, the Union Budget 2010-11 has slightly reduced the corporate tax incidence. So, players should also be withdrawing a part of the accumulated deferred tax credit, as they will revise the net tax incidence to the proposed levels. This can effectively bring down the tax incidence of corporate in FY 2010-11 in general and in the quarter ending June 2010 in particular.

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