New Delhi: A Budget proposal to tax software and back-office service firms two years before a tax-saving scheme expires shocked the $33.2 billion (Rs1.46 lakh crore) technology industry, raising fears among vendors that India would lose its low-cost edge over key emerging competitors in China, the Philippines, East European countries and Vietnam.
Investors spooked by the move, announced by finance minister P. Chidambaram in his Budget speech, dumped software shares. The Bombay Stock Exchange’s information technology index shed 5.8% in a market that shrunk 4%. The top five technology vendors—Tata Consultancy Services, Infosys Technologies, Wipro, Satyam Computer and HCL Technologies—lost Rs24,600 crore in market capitalization.
Chidambaram proposed that software and back-office service firms, who don’t pay any tax on their export revenues, pay a ‘minimum alternate tax’ or MAT of 11.33%. The firms pay corporate taxes at the rate of 33.66% on revenues from India, but such sales are less than a fifth of the industry’s sales. The finance ministry move could raise up to $1 billion in tax revenues. Infosys’ chief financial officer V. Balakrishnan said he expected the company’s net margins to reduce by 1.5% in the current quarter.
The technology industry said it hoped the government would extend the Software Technology Parks of India tax-saving scheme for another 10 years when it expires in March 2009, and retain the concessional MAT rate for the extended period. “If that happens, it would have a mitigating benefit on the industry.” Ramalinga Raju, Satyam’s chairman said.
A $60-billion technology services export target for 2010 could be missed, trade body Nasscom said. “This MAT announcement will see investments coming down and investment decisions beginning to shift to countries like China and the Philippines that offer more incentives,” said Nasscom president Kiran Karnik.
Some companies saw a way to minimize the tax impact by consolidating accounts with overseas business arms. Consolidating accounts with subsidiary firms is not permitted under Indian tax laws, but treating a foreign office as a branch of its Indian operations will help offset taxes paid overseas against local levies.
“Since the tax paid for the branches in foreign countries of the IT companies can be set off against MAT, industry would put efforts to avail this benefit,” said Atul Nishar, chairman, Hexaware Technologies. Nasscom’s Karnik said this option was not clear.
Technology firms also bore the brunt of two other Budget proposals—a fringe benefits tax on employee stock schemes and a decision to impose service tax on the rentals for leased office space.