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`MAT proposal to be hard on small cos; FDI may be hit'

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Hyderabad/New Delhi Feb. 28 Describing the Budget as disappointing from the Nasscom and IT industry perspective, the Nasscom Chairman, Mr B. Ramalinga Raju, said they would petition the Finance Minister about the sector concerns.

Various provisions of the Budget, such as Minimum Alternate Tax (MAT), Fringe Benefit Tax (FBT) when it comes to the applicability for ESOPs (Employee Stock Option Plan), tax on dividend, and service tax on lease, would have an adverse impact on the sector, he said.

Disincentive

The Chairman of Satyam Computer, Mr Raju, said the applicability of FBT on ESOPs is like a disincentive for companies as at the time of exercise of options they would have to pay taxes.

This would impact talent retention and lead to higher attrition levels.

Referring to service tax on lease rentals, he said that the IT sector was dependent on the lease of office and residential space and this only meant that the costs for companies would go up.

On MAT, he said that the FM's move is against the spirit of the sunset clause of the STPI units that ends by 2009. It is not clear if the imposition of this tax is a precursor to the extension of STPI benefits by 10 more years.

The underlying principle for the Government to levy fresh imposts is that the technology sector has matured and has turned competitive. But one must remember that it has just about begun to grow and needs to traverse a longer path.

There is big competition knocking at the door in the form of countries like China, Egypt, and Malaysia willing to offer more benefits on a platter. Hope this does not wean away some companies there, he said.

Big dampener

While the levy of additional one per cent cess for the education sector and focus on human resources is a good move, he said that MAT would be a big dampener particularly for smaller companies and potentially upset their finances.

It is necessary to understand that about 60 per cent of IT companies' costs go towards goes for HR, who contribute about 25-30 per cent to income tax and htis works out to about 15 per cent of revenues from the sector.

By not levying new imposts it would be better to allow them to grow as they would contribute significantly to the exchequer, he explained.

Our Bangalore Bureau reports: Dismayed over the MAT proposals, the Nasscom, said it was a regressive step that withdraws the Government's commitment to provide tax incentives till 2009, on which companies have made their business plans and investment decisions. Further, this could affect investor confidence.

"It is our expectation that the introduction of MAT will be accompanied by an extension of the STPI scheme by 10 years," it said in a statement.

The small and medium IT companies will face the brunt of the MAT, while the larger firms such as TCS, Infosys Technologies and Wipro Ltd among others may not see a major impact.

It expressed concern over selective pass-through status for venture funds and mentioned that issues such as transfer pricing and the method of computation of export turnover have not been addressed as the latter has a bearing on attracting foreign direct investment.

The focus on upgradation of ITIs, thrust on rural infrastructure and e-governance was encouraging.

By imposing the minimum alternative tax (MAT) of 11.22 per cent on the adjustable book profits of IT & ITES companies, the Finance Minister, Mr P. Chidambaram, has paved the way for removal of tax exemptions under Section 10A and 10B of the IT Act for the industry.

Stocks plunge

Reacting negatively to budget proposals, IT stocks plunged on both exchanges on Wednesday.

The CNX IT Index and BSE IT closed lower by about six per cent each.

HCL lost ground by about 10 per cent, while Satyam and Wipro closed lower by 8.42 and 7.34 per cent each. TCS and Infosys also ended lower by over five per cent.

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