Double blow for small, medium IT firms

K.V. Kurmanath Hyderabad | Updated on March 01, 2011

Mr Hari Balasubramaniam

This certainly is not the Budget the small- and medium-sized information technology companies were hoping for. They hoped against hope that the Government will extend the benefits under the Software Technology Parks of India (STPI) scheme at least for a more year when the Government was planning to roll out the Direct Tax Code (DTC).

Higher Minimum Alternate Tax (MAT) and slapping of the tax on special economic zone (SEZ) developers and units has only rubbed salt into the wound. IT industry argues that MAT is globally only one-third of corporate tax, whereas in India it is more than half.

This, in turn, would deplete financial resources that the companies might need for expansion.

Smaller companies, with 100-200 employees on their payroll, are the worst hit. On one hand, the STPI has not been extended and on the other, the cost of moving to an SEZ has become prohibitively high as the Government tries to align the tax structures with DTC. The medium-tier companies worry that the increase in MAT will pare 1-3 percentage points of their bottom line. Infotech Enterprises, which just crossed the Rs 1,000-crore turnover mark, says it might take an impact of Rs 10-12 crore on net profit next year. Mid-sized companies operate on 10-12 per cent margins. This will be affected by 1-3 percentage points, Mr B.V.R. Mohan Reddy, Chairman and Managing Director of Infotech, said.

The growth momentum in the IT Industry is largely limited to large cities where 80 per cent of our industry is located. “If we were to have inclusiveness, we need to incentivise companies go to smaller towns. Benefits such as 10-A and 10-B could have motivated many smaller companies to fan out,” he commented.

Some find themselves in the doldrums having opted for SEZ operations in the last one year. “The entire idea of going in for SEZ's was to save taxes. With MAT rates going up, that purpose will not be achieved. Our fear is that the Government is moving towards a regime of fully taxing the IT industry in future,” said Mr Hanuman Tripathi, Managing Director of mid-size software company Infrasoft Technologies, said.

The company, which did not have a single SEZ unit during the same time last year, generates all of its exports through SEZ. With the new norms, Infrasoft's effective tax rates will shoot up to 20-22 per cent from 10 per cent currently, Mr Tripathi said.

Some opined, too, that lack of incentives for expansion of digital infrastructure hurt the industry. Mr M.P. Vijay Kumar, Chief Financial Officer of Sify Technologies, said his company was completely disappointed here.. “The next phase of growth has to happen only through digital infrastructure. Some fiscal incentives should have come to this sector to enable penetration of broadband services to tier-2, -3 and -4 towns,” he commented.

Mr Ravi S. Rao, President of SME Forum of ITsAP (IT industry in Andhra Pradesh), said the proposals would make it much more difficult for small companies to move to SEZs. According to Mr Sarthak Chandra, Managing Director of IT consultancy firm Sarv Solutions the reduction in corporate surcharge (from 7.5 per cent to 5 per cent) and dividend tax would help the companies.

“IT firms were being a bit more hopeful in eyeing for STPI scheme. The lack of extension of the sops is bound to hurt tier-2 companies,” Mr B. Hari, Chairman, Ontrack Global Systems, said.

(with inputs from Adith Charlie and Abhishek Law)

Published on February 28, 2011

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