The Hindu Business Line : `Move to tax ESOPs a regressive step'

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Kolkata Feb. 28 The Budget proposal to levy fringe benefit tax (FBT) on ESOP has not gone down well with the IT sector in Kolkata. Representatives of the IT sector here have dubbed the proposal as "a regressive measure" and said it would have an adverse impact on the retention of knowledge workers by companies.

It is felt that the proposed imposition of a Minimum Alternate Tax (MAT) of 11.2 per cent on companies will impact the bottomline and surpluses of small and mid-sized IT companies that would otherwise be deployed back into the business. The proposed allocation of Rs 33 crore for manpower resource development in the software sector does not seem to be enough even as tax exemptions on venture capital investments in the IT sector is expected to have marginal impact.

According to Mr Roopen Roy, Partner, PricewaterhouseCoopers, the proposed FBT on ESOP is a "regressive" measure. "Talent is everything in the IT industry, where one has to devise innovative ways of rewarding and retaining talent. The measure is not going to fetch the Government a lot of money but it will be the knowledge worker who will be the loser," he said.

Mr Ajit Khandelwal, Vice-Chairman of BNK eSolutions Pvt Ltd, said the proposed MAT will adversely impact small and mid-sized IT companies. "These companies hardly have access to bank finance. They mostly depend on private equity. The tax exemptions are the little extras that add up to their surpluses."

Adds Mr Kunal Sen, Vice-President of R.S. Software: "This provision will impact capital generation, cash flows and profits of these companies. These, in turn, will impact EPS' and PEs."

The only cheer

Mr Roy said the tax exemptions on venture capital investments in the IT sector will have marginal impact since VCs are high-risk investors who are not driven by tax exemptions.

However, Mr Ambar Mukerji, COO & CFO of Anshin Software Pvt Ltd, feels that this proposal "is the only encouraging thing for the IT sector in the Budget". According to him, the proposed tax exemptions will motivate some VCs to invest in IT start-ups.

All of them opined that the proposed allocation of Rs 33 crore for manpower resource development for the software sector was not enough given the burgeoning growth in the demand for knowledge workers countrywide.