New Delhi/Bangalore: Profitability of Indian software companies are expected to be hit marginally due to the Minimum Alternate Tax being imposed on them in this year’s budget. Software companies will have to pay 11.22% MAT. Shares of IT companies reacted sharply, with the IT sectoral index losing the most on Bombay Stock Exchange. All ten stocks on the index closed in the red.
Companies that benefit from tax exemption under the provisions of the Section 10A and 10B of the Income-Tax Act will have to pay an effective minimum alternate tax of 11.22%, finance minister P. Chidambaram said in his budget speech.
Infosys Technologies Ltd., India’s second-largest software-services exporter, said profitability for the next financial year will dip because of the higher tax rate proposed in the budget.
Net profit margin may shrink 150 basis points as the effective tax rate rises to 16.3% for the year to March 31, 2008, Chief Financial Officer V. Balakrishnan said in a phone interview from Bangalore, where the company is based. Infosys pays 11.3% tax and its net profit margin stood at almost 26% in the last quarter, he said.
“The effective tax rate could go up by another five percentage points,” Balakrishnan said, responding to budget proposal.
Though Wipro though said MAT will have limited implications for it in the next financial year. “The impact will be marginal. We are already paying tax which is similar to the MAT,” Chief Financial Officer Suresh Senapaty told Reuters.
Infosys closed with a loss of about Rs110 at Rs2078.35 on the BSE. Other IT majors also ended in deep red. TCS lost Rs77 to end at Rs1188.45, Wipro fell Rs44 or 7.34% to Rs560.85 and HCL Technologies closed with a loss of over 9% or Rs64 at Rs 96.10.
Units of software companies are covered under Section 10A and 10B of the Income Tax Act. The provisions exempt companies set up in a free trade zone or an export-oriented unit.
Another proposal in the budget is likely to marginally effect IT companies. The budget proposes to include Employee stock options under the fringe-benefit tax.