Market shrugs off tax factor

K. Venkatasubramanian | Updated on March 01, 2011

The markets did not give any thumbs-down for the IT stocks, even as the Finance Minister did not extend tax exemption under the Software Technology Parks of India (STPI) scheme. Across tiers — large, mid and small, stocks closed flat, and in some cases, even marginally up.

Even as tax incidence of some mid-tier IT companies is set to treble, and for some large ones set to expand by as much as 10-12 percentage points in FY12, much of this seems to have been factored into the stock prices. Tax-incidence of IT companies ranges from 8-27 per cent, which is likely to go to 20-30 per cent over the next fiscal.

Burden on the middle

Companies such as Geometric, Persistent Systems and Mphasis that have low single-digit tax-incidence, are set to see that go to 25-30 per cent over FY12.

Patni Computer, KPIT Cummins, Tech Mahindra and NIIT Technologies are set to witness an 8-10 percentage points increase from the current levels of 15-18 per cent as taxes.

This is because these companies that enjoyed benefits under the STPI regime have not moved operations in any major way to tax shelters such as special economic zones (SEZs) , unlike the top-tier players. With the minimum alternate tax too hiked from 18 to 18.5 per cent and units in SEZs too set to be taxed from April 2012, these companies may not see any lowering of taxes over the next couple of years, at least.

It is only the top-tier players, such as Infosys, TCS, Wipro and HCL Technologies, that are well-placed to take the additional burden (with just 3-4 percentage points increase in tax-incidence), as they have moved large parts of their operations into SEZs over the past three-four years. These companies' tax incidence are at 21-27 per cent.

Mid-tier IT companies have been guiding for higher tax-incidence over the last one year, ever since the sunset clause for STPIs was announced. To that extent, the markets seem to have already factored in the increased outflows. Even from a business perspective, with most mid- and small-tier IT companies still posting anaemic growth, these have largely stayed out of the rally that has taken top-tier IT companies to new highs.

Published on February 28, 2011

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