The Hindu Business Line : ‘IT industry must learn to stand on its own legs’

Some things to cheer: (From left) Mr S. Mahalingam, Executive Director and Chief Financial Officer, TCS; Mr Suneel Advani, Vice-Chairman and MD, Blue Star; and Mr Ninad Karpe, MD & CEO, Aptech Ltd, at the live Union Budget session organised by the CII in Mumbai. -

Our Bureau

Bangalore, July 6 The Union Budget has turned out to be a bitter-sweet pill for the domestic IT industry.

While the extension of tax holiday for one more year and abolition of fringe benefit tax provide some cause for cheer, the hike in Minimum Alternate Tax is a dampener of sorts.

“There is no big reason to celebrate. The FBT removal was expected since it was cumbersome to administer. The STPI tax holiday extension for a year more is neither here nor there, since this does not facilitate even medium-term planning, forget long-term,” said Mr Lakshmi Narayanan, Vice-Chairman, Cognizant Technologies.

The removal of FBT, which is a small percentage of the total tax structure, is unlikely to provide big relief for the industry reeling under the global economic crisis. For example, Infosys had an FBT outgo of Rs 24-25 crore in fiscal 2009, while the total provision for taxes was Rs 895 crore. TCS paid some Rs 26.44 crore as FBT out of total tax provision of Rs 838.95 crore.

“FBT was more of an administrative hassle that has been removed,” said Infosys CFO, Mr V. Balakrishnan. Terming the budget as neutral, Mr Balakrishnan said, “The hike in MAT was more of a cash-flow issue and would not have any material impact on the profit and loss account”.

The Budget increased the MAT from 10 per cent to 15 per cent of the book profit, while extending the period allowed to carry forward the tax credit from seven to 10 years. MAT is more of an advance tax which can be off-set against tax liabilities in the future when the tax holiday ends. TCS and Infosys had MAT credit entitlement of Rs 423.73 crore and Rs 284 crore respectively for fiscal 2009.

“The increase in MAT has been balanced by expanding the time-frame for setting-off from 7 years to 10 years which appears fair,” said Mr Suresh Senapaty, CFO, Wipro Ltd.

The Budget also clarified the computation of exempted profits in the case of units in SEZ under Sub-section 7 of Sec 10AA of Income Tax Act. “The ambiguity in terms of having a company or business unit, and not a separate legal entity is removed,” said Mr Sujit Sircar, CFO, iGATE Corp. Earlier, IT firms were supposed to have separate companies located in each of the SEZ units to claim tax benefits. Now, the clarification makes it clear that it is all right if only units or divisions are located in these SEZs.

Signals from budgets

Further, Mr Lakshmi Narayanan said the message from this and the last few budgets is that IT industry must learn to stand on its own legs. “The trend for the last 3 years from the budgets has been downward, not up, for the IT and BPO industry. Progressively, things have gone away. It indicates the government mindset that there is no need for any further tax breaks. In that sense, the best period for us is over and we have to look at other ways to remain competitive,” he added.

The budget also exempted packaged software from excise duty and countervailing duty, treating it as service. “The exemption could make the prices of these software cheaper and affordable for smaller IT firms, ” Mr Ganesh Natarajan, Vice-Chairman and CEO, Zensar Technologies.

Such exemption would increase the velocity of the business, said Mr Balakrishnan of Infosys adding that the company’s banking product Finacle would benefit.

Further, Mr Sircar hopes that clarification relating to service tax exemption would result in refunds. The industry was earlier given exemption on service tax for all services that they took from other service providers, which could be set off against other taxes. “As there was no clarification, some Rs 3000 crore (for the whole industry) was locked up and is yet to see refunds. Now, we hope that those would be refunded,” Mr Sircar said.