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Outsource the taxes?
Article from Business Standard
Priyanka Joshi / New Delhi March 2, 2007
INFORMATION TECHNOLOGY: Industry leaders wonder whether killing the golden
goose was the only option before the finance minister.
It’s up on the wall — the Budget delivered nothing positive for the IT
industry. Kris Gopalakrishnan, president, joint managing director and COO of
Infosys Technologies, lays it out crisp and clear, “...the taxation
proposals are neutral at best”.
Tax increases in the corporate sector will greatly hurt sentiments since tax
collections on the corporate side have gone up by 40 per cent, he says: “The
increase in the dividend distribution rate and levy of 1 per cent surcharge
on tax rates will lead to enormous negative sentiments.”
The Indian IT-ITeS sector is expected to exceed $47.8 billion in revenue in
FY07, an increase of 28 per cent, while contribution to GDP estimated to be
5.4 per cent is up from 4.8 per cent last year.
Multinationals were expected to pump in investments up to $10 billion in FY
2006-07. Nasscom president Kiran Karnik expressed his dismay at the
extension of minimum alternate tax (MAT) on export incomes which were exempt
under sections 10A and 10B. “This is a regressive step,” he clarified.
Higher costs for leased space will adversely affect small and medium
enterprises that do not own office space, reducing competitiveness vis-à-vis
other destinations, reckons Ravi Venkatesan, chairman, Microsoft (India).
“The decision to levy MAT is disappointing as it results in increased costs
by 1.5-2 per cent,” he says. But Venkatesan does pat the FM for the Rs 33
crore allocation for the new scheme constituted for manpower development for
the software industry.
“This is a good start towards skill development, improving the talent
supply, and recognising the need to strengthen the talent supply for the IT
and BPO industry,” he finishes.
The prevalent sentiment is that despite creating 3,80,000 jobs in the IT
sector, comprising 50 per cent of the total jobs created globally and the
largest number of jobs in the organised sector in India, the Budget has
imposed the fringe benefit tax (FBT) on employee stock options.
Deepak Ghaisas, CEO, i-flex solutions, agrees, “The IT industry had some
expectations and I do not think the FM has taken them in to account and if
he has introduced any measures, the impact of these measures is fairly
negative.”
The government should have considered extending the Software Technology Park
scheme and Section 10A of the Income Tax Act beyond 2009, he adds.
Yet another puzzle that Chidambaram did not resolve was the much needed
clarification over the SEZ scheme, which can put many IT companies from
finalising their capital expenditure plans on hold.
However, the Budget has also awarded a pass-through status to venture
capital funds focusing on knowledge intensive sectors in respect of
investments in biotechnology, IT relating to hardware and software
development, and nanotechnology.
“The benefit extended to the semiconductor industry is expected to attract
investments up to $10 billion in the next 4-5 years,” explains Bundeep Singh
Rangar, chairman of IndusView.
According to him, this highlights the need to bridge the digital divide
between developed and developing economies.
“The initiative will open the Indian electronic design automation industry
estimated to grow to $43 billion by 2015 from the current $3 billion through
mergers and acquisitions,” says Rangar.
Budget 2007: The IT Sector Deserves Better
IT News Online Article
2007-03-01
Kris. Gopalakrishnan, President, Joint
Managing Director and Chief Operating Officer, Infosys Technologies Ltd.:
"This budget is a mixed bag. On the fiscal front, there have certainly been
great improvements. Tax collections are up, growth is up. Spending has
increased for the social sector, though nothing radical has been proposed.
Neither are there any transformational initiatives. Higher education
deserved much more, but we have seen less."
"Overall, the budget has certain positives, but the taxation proposals are
neutral at best. On the tax front, reducing custom duty is welcome,
extending the Technology Upgradation Fund to the textile industry is great,
but one would have expected a reduction in the excise rates to expand the
industrial market for India. Tax increases in the corporate sector will
greatly hurt sentiments since tax collections on the corporate side have
gone up by 40%. Certainly, the industry was looking for relief from
surcharge levies. The increase in the dividend distribution rate and levy of
1% surcharge on tax rates has created enormous negative sentiments."
"The IT sector is growing at a rapid pace and the industry expected no
change in the 10A, 10B regime while expecting an extension of time frame.
Obviously, this has not come about in the budget but the changes in the
budget to bring 10A and 10B companies under MAT is a retrograde step as
commitments have been made to keep the exemption going till 2009."
"The IT sector this year will create 380,000 jobs, which comprise 50% of the
total jobs created globally, and the largest number of jobs in the organized
sector in India. The FBT levy on stock options adversely affects one of the
major employee retention tools for the IT sector. The IT sector deserves
better because of its job creation potential."
"Overall, the budget does not have anything positive for the IT sector."
Nandu Kumar Pradhan, President and MD, Red Hat India:
"The Budget clearly brings out the Government's commitment to drive societal
change through education. This can be seen in the increase in budgetary
allocation for the Sarva Shiksha Abhiyan and restructuring of ITIs amongst
others. Commitment from the government with an increase in allocation for
eGovernance projects both at the Center and State will help drive the growth
of the Domestic IT industry."
"With the pass through status granted to Venture Capitalists in the areas of
Biotechnology, Information Technology and Nano Technology, will help the
Indian entrepreneurs create software, hardware products and Intellectual
Property development.
Alok Gupta, Director Marketing, Unistal Systems:
"The imposition of MAT at an effective rate of 11.22% on book profits has
wiped away the benefits that we were to enjoy until 2009. Apart from this
the imposition of fringe benefit tax on ESOPs has come up as a surprise for
us. The Ministry did not concede the industry's demand to extend the tax
holiday available to software and IT enabled services companies under the
software technology park (STP) scheme beyond 2009."
Mahendra Lalwani, MD, ZyXEL Technology India Pvt. Ltd.:
"We welcome the government's decision to maintain the current excise and
custom duty levels on IT products. But at the same time we are disappointed
with the government's decision to extend the minimum alternate tax (MAT) and
also their move to slap a fringe benefit tax on ESOPs."
Tripathi, MD, Infrasoft Technologies:
"Since InfrasoftTech is a banking solutions company, first comment is that
the regional rural banks are given a boost by the FM, permitting them to
enter FX business and accept NRE and FCNR Deposits. Branch expansion has
been permitted to RRBs. Hopefully, RRBs that have completely rural centric
business model and HR to meet this business need, can benefit from this
change."
"On other SSI businesses, excise waiver for companies up to sales of Rs.
1.50 crore is good for small sector. This won't help IT companies as this
size is not feasible even for the start ups in IT and ITES industry."
"No surcharge on income tax for companies having taxable income up to Rs. 1
crore is good for generic industries, for companies ranging in turnover of
about Rs. 10-15 crores, considering a 10%-15% profit margin for them on
which they pay tax. However, most IT companies in this category have been
exporters, thus may see no benefit from this."
"For right-sized SME and mid-cap IT and ITES companies who still have to
cross $100 million in revenues or those who are not in the Billion Dollar
Club, this budget is nothing, but bad news."
"The FM who himself had promised a ten year tax break till 2009, has gone
ahead to introduce MAT for all the businesses, there by taking away the tax
break the IT industry had planned on the government's past assurances. The
government fails to see the contribution the IT industry has made in terms
of generating employment, infrastructure, exports and a international brand,
that the tax collection in lieu would have never achieved."
"FBT on ESOPs is a badly calculated tax. ESOP price difference was already
hitting profit and loss accounts of the current year for companies, instead
of allowing a deduction from the net-worth of the company. IT companies
thrive on current year PE multiples and thus would like to maximize their
PAT. The issue of ESOPs for retention and participation of employees in
services companies was therefore as such not getting conducive treatment by
the government for years."
"The FM has assumed that companies are using ESOPs as a vehicle to lower
their taxable income, which is grossly incorrect. The FM has also assumed
that companies are using ESOPs as a vehicle to lower their taxable income,
which is grossly incorrect. On top of it, adding FBT to ESOPS will further
discourage people centric services companies to seek higher employee
participation."
Deepak Prasad, Vice President, Global Sourcing, Safenet Infotech Pvt. Ltd.:
"Not a very promising budget, really! No specific fillip for the fledgling,
growing Indian software product industry either. The IT sector, which has
been doing well, will instead see a rise in taxes through MAT (specially the
small to mid-sized firms). There is little or no mention on initiatives for
export, instead, as I understand there have been increase in taxes on the
software services exporters."
"The cost structure for companies will generally be impacted due to
additional service taxes on rentals and also through additional dividend
distribution tax for firms after they pay the requisite income taxes."
Col. Balwinder Singh, Director, Targus Technologies:
"The budget is progressive and forward looking especially the allocation for
egovernance, which has been enhanced by 82% to Rs. 719 crore in 2007-08 to
fund the ambitious program. The planned expansion of expenditure on
e-governance is a good signal for the IT industry. It will serve to expand
the domestic market and IT firms will see government spending coming their
way. I also welcome the decision to maintain the current excise and custom
duty levels on IT products. Besides, the increase in SSI exemption limit for
the IT hardware industry, which has been raised to 1.5 crores is also
encouraging."
Is Budget Unfavourable to Corporates?
Article from Moneycontrol.com
So a mundane Budget it seems - almost non-sensational. But wait, the devil
is in the details and the details don't quite favour corporate India. The FM
may not have tinkered with key tax rates, but he certainly has widened the
base. Lots of minor moves that add upto a taxing Budget for corporate India.
CNBC-TV18 reports that cement and IT companies will bear the worst brunt.
No change in key tax rates - you could say the Finance Minister did as his
government promised. But that's not how cement and IT companies are seeing
it this Wednesday. In the first such move of it's kind in India, the Finance
Minister linked the excise tax rate on cement to it's selling price.
So it is a lower tax rate for a bag selling at less than Rs 190, and a 33%
higher rate for a bag priced at more than Rs 190. The intention is to rein
in prices and inflation - but it is not going down very well with the cement
industry.
Also, taking it on the chin are IT companies. The FM has proposed an 11.33%
Minimum Alternate Tax, or MAT, on the book profits of IT companies, who have
so far enjoyed an exemption. The tech sector is bracing itself for a margin
hit.
S Ramadorai, CEO & MD, TCS says, "There will certainly be a margin impact of
about 1.5% - 1.6% as we see it today and on the basis of our understanding.
But in case there is a clarity that evolves with regards to the offsets,
then we need to recaliberate it, of course, assuming what we have
understood, the implication is 1.6% in the margins on the profit after tax.
The news gets tougher - while the Finance Minister has left key tax rates
untouched, he has imposed an additional 1% education cess on all taxes. The
Dividend Distribution Tax rate will go up from 12.5% to 15% and ESOPs will
now come with an FBT price tag, with the difference between the market value
and ESOP issue price to be taxed as FBT - a whopping 30%.
The service tax threshold exemption limit has been doubled to Rs 8 lakh,
which means over 2 lakh small service providers will go out of tax net. But
several new services will now be taxed such as Works Contract, Renting of
Commercial property and even offshore services.
On the flipside and as part of the inflation attack, the excise duty on
petrol and diesel has been reduced from 8% to 6%. On the customs front, the
peak rate has been brought down to 10% and import duties on several items
like polyster yarns, plastics and medical equipment have been reduced to
7.5%.
But net-net, corporate India may have to share more of the spoils this year.
Budget will provide new opportunities for
American companies to engage in the Indian market
February 28, 2007: U.S.-India Business
Council (USIBC) has warmly welcomed the release of India’s 2007-08 Union
Budget and its inclusive-growth message.
“The U.S.-India Business Council is pleased with the initiatives listed in
the 2007-08 Union Budget. It should achieve a balance of promoting
infrastructure growth while combating inflation, and provide new
opportunities for American companies to engage in the Indian market,” said
Ron Somers, President of USIBC.
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