The recent trend of job cuts in the Information and Technology (IT) is likely to continue as the IT sector will be taxed at the earlier 25 per cent rate. As per the sources in the government, software development does not come under manufacturing, hence will not be eligible for the 15 per cent tax rate applicable to new manufacturing entities. Financial daily, the Economic Times reported that the government is scheduled to table a Bill in Parliament in the upcoming winter session to clear the air around the issue and other similar matters.
Earlier this year in September, the Centre has promulgated an ordinance on the issue and the bill is expected to replace the same in the winter session which started today, November 18.
One of the officials close to the development said, "The amendment Bill will clarify that 15 per cent corporate tax rate is only for new manufacturing entities and that software development is not manufacturing." The development has come after the IT industry requested clarification on whether software development could be treated as manufacturing and be eligible for the reduced tax rate.
Sitharaman announces corporate tax reduction
In September, Nirmala Sitharaman, announced the reduction in the corporate tax rate to 22 per cent for companies that do not seek exemptions or incentives, and to 15 per cent, from the current 25 per cent, for new manufacturing companies, giving a major relief for the Indian corporate sector. Moreover, it was further announced that any new Indian company started on or after October 1 making fresh investment in manufacturing and starting operations before March 31, 2023, will be taxed at 15 per cent as against 25 per cent earlier. The decision meant India becoming the lowest tax jurisdictions in South and Southeast Asia.
Why it's a cause of concern for IT firms?
The amendment may force the newly started IT companies to cut jobs. In recent times, major IT firms including Cognizant and Infosys have fired many people. Mahindra and Mahindra also warned its employees of such cuts in headcounts in the company amid lower than expected results for the last quarter. With the economic slowdown in the country, the smaller and newly started software manufacturing companies are expected to feel the brunt. However, the apex court in the judgment in the past has clarified that manufacturing means a change, bringing into existence a new and distinct object or article or thing with a different chemical composition or integral structure.
