Biggies benefit.

K.Venkatasubramanian

Mid- and small-sized IT companies can breathe easier with the extension of the sunset clause for tax benefits under the software technology parks scheme by another year.

Grappling with revenue declines, these companies are working towards increasing offshore component of revenues and deferring salary hikes to maintain margins. Top-tier IT companies such as Infosys Technologies, TCS, Wipro and HCL Technologies have a tax incidence of 11-16 per cent. The extension by a year of such benefits should ease any potential strain on profitability.

Mid-tier IT companies such as Tech Mahindra, MindTree, 3i Infotech and KPIT Cummins have a 8-15 per cent tax incidence. Though both category of IT companies would welcome this move, the mid and smaller IT companies would be more relieved for the time being as larger companies have formulated detailed roadmaps for moving to special economic zones (SEZs) over the next few years. Infosys already earns about 9 per cent of its revenues from SEZs.

For smaller IT companies, the prospect of the capital expenditure that has to be incurred to move to an SEZ and start operations might be prohibitive. These companies will hope for further extensions to the tax breaks.

The increase of minimum alternate tax from 10 per cent to 15 per cent means that tax outflows will increase for IT majors. With the current tax regime, top-tier IT companies enjoy a ‘MAT credit entitlement’ which lowers their overall tax amount. This amount currently stands at between Rs 91.1 crore to 423.7 crore for companies such as HCL, TCS and Infosys. This credit entitlement would go down once the MAT clause starts to kick in and, to that extent, there could be a decline in profits after tax.

The abolition of FBT may have marginal impact on most IT companies which incur FBT predominantly for the stock options that they offer. FBT as a percentage of total taxes paid by these companies, is in a wide range of 3-18 per cent. Among the top-tier IT companies, HCL (based on 2007-08 financials) may see its overall tax incidence come down by a couple of percentage points, while Wipro may see a decline of about a per cent. For TCS, the impact is negligible. Among mid-tier IT companies, abolition of the FBT may bring down overall tax incidence by 0.7-1.5 percentage points.

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