The Hindu Business Line : Frontline IT cos give away more to taxman

Top Indian software companies are making a bigger contribution to the exchequer, than was the case a year ago. Frontline software companies have seen a significant increase in their tax incidence over the past year, going by their September quarter results. Of the top five, TCS, Infosys Technologies, Satyam Computer and HCL Technologies have seen taxes taking away a larger share of their profits in September 2007, compared to the same quarter in 2006.

Wipro lowered its tax outgo in this period, probably due to its mix of IT and non-IT businesses. The tax incidence for these companies now hovers between 10 and 15 per cent of their profits, compared to 8-13 per cent a year ago. For over 2,000 listed companies of India Inc, it averaged 30 per cent in the September quarter.

Infosys, which has seen its tax incidence surge from 11.7 per cent in September 2006 to 15 per cent in the latest quarter, attributes this increase primarily to a higher proportion of revenues generated onsite (delivering services at the client’s location).

Typically, high value services such as consulting, package implementation and engineering services, as well as some low value services, are rendered at the client’s premises or close to the client’s location. Revenues and profits generated from these services are taxable in the respective countries. This could also explain the increase in tax outlay for other top tier companies such as TCS, Satyam or HCL Tech, as these companies derive over 50 per cent of their revenues from onsite work. As tier-I companies move up the value chain, this proportion may be expected to increase, unless such services are offshored.

Tax incidence for all of the IT majors are expected to edge up in future, as the tax shelter on operations out of software technology parks (STPI) are phased out. Both Infosys and TCS have indicated that as the current STPI scheme and its attendant tax benefits cease from 2009, the tax incidence may go up. All these companies are looking to move operations to SEZs and have indicated that tax incidence could be in the 20-22 per cent range, during the transition phase.