Indian IT companies that are operational by 2014 can enjoy the incentives provided in the present tax regime even when the direct taxes code (DTC) comes into effect. But the imposition of 20 per cent minimum alternate tax (MAT) has proved to be a damper for the sector.
Industry experts were also of the opinion that since DTC did not mention anything on Software Technology Parks of India (STPI), the scheme might not get an extension. Imposition of MAT will impact the profitability of the country’s $50-billion software services export industry.
According to the Bill, introduced in the Lok Sabha on Monday, developers have to notify their SEZs by March 31, 2012 and get them operationalised by March 31, 2014 to benefit from the existing profit-linked tax incentives. However, SEZ units that enjoy fiscal incentives such as exemption from dividend distribution tax, corporate tax waiver on export income for 15 years and exemption from minimum alternative tax (MAT), will now have to pay 20 per cent MAT.
“Grandfathering of profit-linked tax incentives for SEZ units operational on or before March 31, 2014 under the DTC Bill 2010 is a welcome move for the Indian IT/ITeS industry. For new units set up after March 2014 the investment linked regime will apply. However, the biggest set-back for the industry is that the MAT exemption currently available for the SEZ units has been withdrawn. MAT of 20 per cent during the tax holiday period will hurt the industry from a cash flow perspective and make the SEZ scheme less attractive,” said Naveen Aggarwal, executive director, KPMG.
Som Mittal, President Nasscom – an IT industry body – said that for the small and medium businesses this will not be too useful. “The DTC doesn’t talk about the STPI scheme which expires in 2011. We will urge the government for one more year of STPI. However, we welcome the bill as the earlier DTC had no SEZ clause in it. But, we need a sunset clause rather than grandfathering as all SEZs want to get notified before 2012, then these will come up largely in Tier-I cities. We need a scheme for Tier-II and Tier-III cities.”
India’s second largest IT service firm, Infosys Technologies, welcomed the move. “The DTC proposal is good for the IT industry because earlier there was a lot of concern as the government was planning to end tax benefits for SEZs that get notified by March 31, 2011. The extension of the deadline by one more year has come as a breather for the industry, which has now got enough time to get the approval and complete them,” said V Balakrishnan, CFO of Infosys Technologies.
At present, nearly 17-18 per cent Infosys revenues come from its units located in IT SEZs. The company said all the incremental growth will now come from the SEZs it is setting up in places like Chennai, Bangalore, Pune and Hyderabad.
However, as Mittal pointed out the imposition of 20 per cent MAT has acted as a damper. “MAT is not a positive step for the industry as they have changed the rules of the game. Especially for small and medium businesses, it is a challenge and their planning will go haywire,” said BVR Mohan Reddy, chairman and managing director of Infotech Enterprises. “Our STPI licences have all expired, and MAT will not have any impact on us as we are already paying taxes at 21.3 per cent.”
| TAKING IT TO THE MAT # Imposition of 20 per cent minimum alternate tax could be a damper for the sector # Experts felt, since DTC did not mention anything on Software Technology Parks of India, the scheme might not get an extension # According to the Bill developers have to notify their SEZs by March 31, 2012, and get them operationalised by March 31, 2014 to benefit from the existing profit-linked tax incentives # But SEZ units that enjoy fiscal incentives such as exemption from dividend distribution tax, corporate tax waiver on export income for 15 years and exemption from MAT will now have to pay 20 per cent MAT # For new units set up after March 2014, the investment-linked regime will apply # For the small and medium businesses, this will not be too useful |
For mid-cap firm Four Soft this will mean a change in its operations. “Companies like us will definitely get affected adversely by MAT. From the industry point, we have to try to do as best as we can. We will try to figure out the most cost optimal way of operating once we have all the details in place and then chart out the best strategy which will work out for us,” said Rajasekhar Roy, chief executive officer of Four Soft.
L Suresh, president of the IT&ITeS Industry Association of Andhra Pradesh, feels that the imposition of MAT takes away all the benefits of having a unit in SEZ. “Even if companies get income tax benefits, they would have to pay MAT at 20 per cent. Earlier, the assumption was that we don’t have to pay income tax for five years.”
For Hyderabad-based Nexxoft Infotel, which was planning to set up campus in SEZ in Andhra Pradesh is now revisiting its strategy. “We are planning to have a campus and were in talks with two SEZs. But MAT of 20 per cent should be a burden on the company. Our board of directors would meet tomorrow (September 1) and looking at some other options other than SEZ is part of the agenda,” said Rakesh Joshi, chief financial officer of Nexxoft Infotel.
