The Hindu Business Line : Tax blues for Tier-II players

With no proposals in the 2008 Budget to extend the tax holiday on Software Technology Parks (STPIs), tax incidence for all of the IT majors could edge up in future, as the tax shelter under Section 10A/B is being phased out after March 31, 2009. Frontline IT companies, which expect tax incidence to rise, are looking to move operations to SEZs.

Transition to SEZs

TCS and Infosys have indicated that tax incidence could be in the 20-22 per cent range, during this transition phase.

This is a steep hike compared to the current levels of 10-13 percent. While Tier-I companies may have the ability to transition to SEZs, the same may not necessarily be an option for mid-sized and smaller players in IT services. A higher tax incidence (22 per cent and above) may significantly dent the profitability of these players, widening the gulf between them and the Tier-I players.

Frontline software companies such as TCS, Infosys and Satyam have already seen taxes taking away a larger share of profits in the recent nine-month period, attributed mainly to a higher proportion of onsite revenues. HCL Technologies has seen its tax incidence jump to 11.5 per cent in the six months ended December 2007, from 8.4 per cent in the same period last year.

Tax incidence

Wipro lowered its tax outgo in this period, probably due to its mix of IT and non-IT businesses. Infosys’ tax incidence surged to 15 per cent in the latest quarter, as it derived a higher proportion of onsite revenues. All Tier-1 companies derive about 50 per cent of their revenues from onsite operations; revenues and profits generated from these services are taxable in the respective countries. Typically, high-value services such as consulting, package implementation and engineering services are rendered at or close to the client’s premises. As Tier-I companies move up the value chain, this proportion may be expected to increase, unless such services are offshored.

However, Mr.Chidambaram, speaking to FIIs on television has indicated that, with more than a year to go for the sunset clause on STPIs to expire, a decision on this and the tax implications of existing IT companies moving to a SEZ will be taken in due course.

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