Lamentation from the software industry is loud and clear: tax sops that small companies wanted, extended under the STPI scheme, are absent; imposition of Minimum Alternate Tax (MAT) on profits from special economic zone (SEZ) is an insult added to the above injury.

NASSCOM, representing the IT-BPO industry, expressed its disappointment over the proposals of the Union Budget 2011-12 stating that while the Budget chartered a roadmap on sustaining a high growth trajectory for the country, it missed the relevant thrust for business to enable this growth.

The apex body said even though the services sector was lauded for its double-digit growth rates, the fastest-growing services industry, IT-BPO, faced double negatives — imposition of MAT on profits from SEZs and withdrawal of tax exemption under Section 10A/10B.

It pointed out that the SEZ scheme was announced as an act of Parliament, and only last year it was clarified that under the Direct Tax Code (DTC) SEZ units set up till 2014 would continue to get profit-linked tax exemptions. Imposition MAT at 18.5 per cent with an effective rate of nearly 20 per cent nullifies the impact of any such incentive. “This will be a deterrent for small companies, and for tier-2/-3 cities that were looking to attract investments under the SEZ scheme.”

It, however, said certain policy announcements related to service-tax refunds and transfer-pricing aimed at simplification and reducing litigation weer a welcome step.

Mr Suresh Senapaty, Executive Director and Chief Financial Officer, Wipro, agreed with Nasscom's view on the reversal of promised benefits for SEZs by way of imposition of MAT and dividend tax, and increase in the rate of MAT which was already very high. “These are clearly retrograde steps. Like in the past, this budget too promises a lot. How the Government executes on these is what the world will be looking at during remainder of their tenure. The overall summary is— the diagnosis is very good, the challenge is now in the treatment.”

IT major Infosys felt that these announcements by the Finance Minister would not really affect the company's operations. Its Senior Vice-President and Chief Financial Officer, Mr V. Balakrishnan, said the company is already paying an effective tax of 27 per cent and MAT of more than 20 per cent, and hence it would not affect them. He said the removal of tax holidays on STPI will affect only the smaller companies. “The larger companies can manage (with) it.”

Mid-sized firms

Mphasis — a relatively smaller company than the bellwethers, but big enough to operate out of SEZs — said it would feel the impact. Its Chief Financial Officer, Mr Ganesh Murthy, said the MAT on SEZs of 18.5 per cent means that the tax-free days for the IT sector are over. “In our case, 20 per cent of our business comes from SEZ, and hence the impact from MAT will be around 3 per cent on our bottom-line,” he said.

iGate, a recent entrant into the billion-dollar revenue club with its acquisition of Patni Computers, too was disappointed with the imposition of MAT on SEZ operations. Its CFO, Mr Sujit Sircar, warned of a decline in investments into SEZs following this. “Withdrawal of the above exemptions will lead to payment of MAT at 19.93 per cent on the book profits and dividend distribution tax of 16.61 per cent on the dividends declared.”

Ms Neeru Ahuja, Partner at consulting firm Deloitte Haskins & Sells said the new proposals clearly indicate that the corporate sector needs to look beyond tax holidays to make businesses competitive. Another consulting firm, KPMG, described the introduction of MAT on SEZ units as a retrograde step.

Angel Broking said plan allocation for school education has been increased 24 per cent to Rs 52,057 crore in the next fiscal which would boost business opportunities for IT-education companies, including Everonn, Educomp and EdServ.

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