BANGALORE: Small and medium sized IT companies that are still recovering from the 2008-09 economic downturn and finding the going tough under conditions of wage inflation and margin pressures, will also have to deal with a more difficult tax structure announced in the budget.
The tax exemption for IT companies registered under the Software Technology Parks of India (STPI) has not been extended making export income taxable for them from fiscal 2012. Companies in special economic zones (SEZs) that were previously exempt from the minimum alternate tax (MAT), will now have to pay 18.5% of the company’s book profit as MAT.
Hanuman Tripathi, group MD of Infrasoft Technologies, said that the company’s total tax incidence will now go up from 10-12 % to 20-22 % of revenues. “The greatest advantage of setting up operations in an SEZ was the tax relief. However, with 18.5% MAT being introduced, the very purpose of introducing SEZs has been defeated,” he said.
A higher tax burden means less money available for undertaking capital expenditure, new recruitments, expanding marketing and sales teams etc. “The big 5 IT companies have become major global players thanks to the tax benefits they received in their early growth stages.
If you want to create the next set of global giants in IT, tax benefits are vital,” added Tripathi. The bigger IT companies are not impacted much by the MAT proposal because many of their units, having been in operation for more than ten years, have come out of the STPI tax holiday scheme and they already pay significant taxes.
Infosys’s effective tax rate is currently 27%.
Ashank Desai, co-founder of Mastek, said export competitiveness of small-medium sized IT companies would get affected. “With margins under pressure we might have to pass on increased costs to clients. This will affect our competitiveness against the likes of China, which are investing huge sums to improve their IT sector,” he said.