As a knee-jerk reaction, while the money implications are huge, the philosophy and the concept are worrisome, says Mr Kiran Karnik.

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IF the fringe benefit tax proposed in the 2005-06 Budget is applicable to travelling expenses of IT companies, smaller organisations in the software industry may be hit harder than the larger ones.

Bigger software companies having great profit margins may not see a huge impact on their bottomline on account of this new tax.

For instance, Infosys' travelling expenses for the quarter ended December 31, 2004 was about Rs 56 crore. Even assuming that the entire amount is treated as fringe benefit, 20 per cent of that amount is taxable at 30 per cent, resulting in a tax burden of about Rs 4 crore.

Extrapolated to a full year, that amount is about Rs 16 crore, which may not be significant for top IT companies whose profits run into hundreds of crore. Wipro's figures are comparable.

Asked if this tax might not impact companies too hard, Mr Kiran Karnik, President, Nasscom, said, "The Rs 16-crore figure you have indicated could be an underestimate if it only takes into account travel expenses. There is a huge list of items including hotel expenses and others also included in the fringe benefits."

He added that the industry is greatly concerned, as travel expense itself is not a trivial amount. Nasscom is trying to check whether taxation of fringe benefits exists anywhere in the world, he said.

"As a knee-jerk reaction, while the money implications are huge, the philosophy and the concept are worrisome. "Work is not a fringe benefit. I can understand if it is something like health-club membership."

He agrees that small companies would be hit harder. "Their margins are low. A company doing reasonably well has a 10-15 per cent margin," he says. It would obviously impact the bottom line of the industry, according to him.

From a look at the profit and loss statement of a few smaller companies it is clear that anywhere between 3 and 7 per cent of their net profit for the latest completed financial year would have been eroded had this tax been applied then.

Asked if that was a signficant portion of net profits, Mr Ganesh Natarajan, CEO, Zensar Technologies, said, "The fringe benefits tax, if interpreted loosely, could have a significant impact on the entire industry."

Mr V Sundararajan, Chief Financial Officer, Aztec Software, says that in the last nine months, Aztec's sales doubled and the travel expenses have been about 50 per cent of that.

On an average, travel costs are 50 per cent of billing and companies with more onsite component will be the worst hit as would companies with direct operations in the US than those with subsidiaries, he said.

Aztec recorded a net profit of Rs 11.3 crore on revenues of Rs 62.03 crore for the nine months ended December 31, 2004. Mr Subash Menon, CEO, Subex Systems, a company that sells software products to the telecom industry says that overseas travel expenses form 13 per cent of revenues and the new tax could reduce profitability by a couple of percentage points.

Asked to quantify the impact of this tax on profits, Mr Deepak Ghaisas, CEO for i-flex' India operations and CFO for the global entity, said, "If you multiply our entire existing cost by 1.3, then I suppose that would be our new cost. No country has income-tax and expenditure tax."

According to him, "Every expenditure made for employees could be a perquisite a Satyanarayan pooja done by mill-workers could qualify. In the BPO sector, Friday bashes could qualify, when actually they are productivity measures rather than perquisites."

And, he has a thought-provoking question, "If I take 10 people out to a business dinner and five of them are my employees, then would half of my bill constitute an employee perquisite?"

(This article was published in the Business Line print edition dated March 2, 2005)
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