The Hindu Business Line : IT put on a MAT diet

For the Indian IT industry — recently described by the Prime Minister, Mr Manmohan Singh, as `an industry which is the torch-bearer of India's image in the world' — the Finance Minister's imposition of MAT at an effective rate of 11.22 per cent on book profits has recalibrated the assumed benefits that this sector was to enjoy until 2009.

The wealth generated by Indian IT has been widely distributed and used for employment generation nationally, for building up the country's physical and human infrastructure as well as for leading India Inc's global adventures. The IT industry pays tax in other geographies currently, but it remains to be seen whether the MAT burden can be off-set against this. The only silver lining for the IT industry is that by making the MAT connected to companies enjoying tax breaks under Section 10A and 10B, it seems to be hinting that the tax incentives under the STPI scheme will be extended beyond 2009.

The increase in dividend tax paid by corporations to 15 per cent from the current 12.5 per cent is also a burden as the IT sector has been good at utilising its profits by investing in physical infrastructure and human resources for the future, rewarding shareholders consistently and acting as a magnet for drawing in large FII investments into the Indian market.

And for a sector that is reliant on human talent, bringing ESOPs under the FBT umbrella could also prove a dampener. On the whole, the Budget announced policies that provide an overall thrust to agriculture and the social sector and offer a good basis for sustained growth over the long-term.

While the increased outlays on education and health are much needed, more crucial to the IT and other knowledge industries is the plan to fund finishing schools, upgrade the ITIs (Rs 750 provided) as well as the additional one percentage point cess to fund secondary education.

The thrust given to e-governance is another noteworthy point, driven largely by the satisfactory experience of the Finance Ministry, whose revenue collections have been greatly helped since the introduction of e-filing of taxes.

The author is Chief Financial Officer, TCS