IT firms left bruised

Then he sprung an unpleasant surprise on large IT companies enjoying tax breaks in SEZs.  Companies located in STPI units across the country used to get tax exemptions under section 10A and 10B of the Income Tax Act. The incentive came with a sunset clause and expired in 2009, but was extended twice annually since then. Tax exemption is to end on March 31, 2011.

Sanjay Tyagi, Director-in-charge at STPI, Bangalore, said, the budget was bad news for the industry, just emerging out of the recession. About 4,200 small and medium firms (SMBs) are reportedly registered with STPIs across the country.

“SMBs work with small margins and lack of tax incentives would hit their bottom line,” said Tyagi. Agreeing with him, Hanuman Tripathi, MD, Infrasoft Technologies, said most Indian firms had a profit margin of less than 20 per cent. If the average tax rate settles around 15 per cent, it would become very tough for Indian firms. “With the West still in a recessionary mood, it is going to be very tough for Indian firms to achieve growth or face customers,” he added.   Tripathi said the termination of tax breaks was shortsighted.

”Instead of being satisfied with the achievements of the industry, the FM should have focused on creating the next generation of one billion dollar firms,” he noted.  
Rising wages and the lack of incentives may make India uncompetitive when compared to other emerging locations, which are aggressively pursuing the IT industry. “The Malaysian  government offers free space, free power and even pays salaries if you are creating IP in that country. Indian firms would start looking at other global destinations with more interest,” Tripathi said.  

To escape the sunset clause, the larger IT firms started shifting their new business from STPI to SEZ to enjoy an extended tax holiday. But Mukherjee did not spare them either and increased Minimum Alternate Tax (MAT) to 18.5 per cent. Sanketh Arouje of Dun & Bradstreet said though MAT is not sector specific, it has been extended to SEZ developers as well as units operating in them, including large IT firms.

“Reversal of promised benefits for SEZs by way of imposition of MAT,  dividend tax  and increase in the rate of MAT, which was already very high, are retrograde steps,” said Wipro CFO Suresh Senapaty.