The Hindu Business Line : Soft on IT, hard on steel products

Software companies, especially the mid- and small-sized ones, can now breathe easier with the Government initiating a move to extend the Software Technology Parks of India (STPI) scheme by one more year.

The proposal to extend the STPI scheme by a year till March 2010, may allow companies to continue with present tax incidence for one more year. The benefit is more pronounced for mid-tier and smaller IT services, given that they could not have easily used the option of moving to SEZs to keep their tax rates under check.

Tax benefits

Companies such as MindTree, Zylog Systems and Hexaware currently have a tax incidence of between 10 per cent and 12 per cent, around the MAT rate. They were all staring at a jump in incidence to 20-22 per cent, once the tax benefits under Section 10A (relating to STPI) were removed.

In light of uncertain IT spends of global clients and pricing pressures, which by themselves present challenges, a higher tax incidence would have further cut into these companies’ profitability. Top-tier IT services companies such as Infosys, TCS and Satyam, which pay between 12 and 15 per cent of profits to the taxman, would also stand to benefit from this proposal. The extended time window may help them plan their migration to SEZs better.

Mixed impact

The Government’s proposal to introduce a 5 per cent export duty on primary steel and HR (hot rolled) coils may provide the much-needed relief on raw material costs to the domestic steel pipe makers. But, the proposed export tax could adversely impact companies with a large export presence. Companies such as PSL and Maharashtra Seamless, which sell mainly in the domestic markets, would benefit significantly from the move, as they may get relief from upward-bound steel prices.

However, the move to impose a 10 per cent export duty on steel pipes is adverse for companies like Welspun Gujarat Stahl Rohren, with a high reliance on exports, as it may dent realisations. The company’s ability to pass on the export duty through price hikes is also uncertain in a competitive scenario. The changes would come into effect from the day the Finance Bill is passed by Parliament.

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