India IT cool to Budget 2011-12: thumbs down for TechParks suspense, MAT hike

The Indian Information Technology has little to cheer about in the Union Budget presented on Monday. In what is becoming a case of tired déjà vu, the government is deafeningly silent on extending the tax benefits enjoyed by units functioning in Software technology parks and has simultaneously upped the minimum alternate tax -- a ploy that  takes with one hand, concessions given with the other. Here is a first reaction of the impact on Infotech, which we have sourced from (  )

MoneyControl: FM shatters IT cos' hopes; ignores STPI extension, ups MAT Finance Minister Pranab Mukherjee has definitely upset technology companies by ignoring the extention of tax benefits under the Software Technology Parks of India (STPI) scheme in the Union Budget 2011-12. The FM has also raised the minimum alternate tax (MAT) to 18.5% from 18% as per the Direct Tax Code (DTC), thus, saddening tier-I IT companies that have set up their SEZs who will now be affected with an increase in the tax rates from FY12.
The IT firms eyed for an extension of tax benefits under the Software Technology Parks of India (STPI) scheme. The STPI tax benefits available to the IT companies is about to lapse in March 2011. The lack of extension of the sops is bound to hurt tier-II companies that are currently receiving benefits.
The denial of further sops is bound to affect mid-sized and smaller IT stocks like Hexaware, Zensar, Allied Digital, Mphasis, 3i-Infotech, CMC and others. The increase in the taxes are set to influence big IT names like Infosys, Wipro, HCL Tech and others.
India's USD 60 billion technology services industry is a major contributor to the country's GDP. The growth monster, post the slowdown, is back on secular growth trend led by strong growth in the export market.
However, while earnings of the companies have been positive so far, revenue growth is a concern for IT companies. Volume growth has been slower than expected. The managements of IT companies are confident that future outlook would be better with increasing IT budgets.
Also discretionary spending is witnessing a revival. While the big-players are not facing problems currently, the small and mid-sized ones are struggling to grow post the recession, and so a slew of measures such as the STPI extension and tax clarifications would have provided an improvement in their bottom-lines that would fuel future growth.

NASSCOM's disappointment with the budget

Software industry body, NASSCOM, expressed its disappointment on the Union Budget Proposals 2011-12 “that chartered a roadmap on sustaining a high growth trajectory for the country, but missed the relevant thrust for business to enable this growth”.
The services sector was lauded for its double digit growth rates, but the fastest growing services industry, IT-BPO faced double negatives – imposition of MAT on SEZ and withdrawal of tax exemption under Section 10A/10B, NASSCOM said in a statement.
“The SEZ Scheme was announced as an Act of Parliament and only last year it was clarified that under Direct Tax Code (DTC), SEZ units set up till 2014 will continue to get profit-linked tax exemptions. Imposition of MAT at 18.5 per cent with an effective rate of nearly 20 per cent, nullifies the impact of any such incentive. This will be a deterrent for small companies, tier 2/3 cities that were looking at expanding in the SEZ scheme.”
NASSCOM said it had also requested the government that since the DTC will come into play from 2012, the tax exemptions under section 10A/10B should be extended by one year, so that companies can prepare for the new regime and relevant incentives as applicable for the services sector can be introduced under the DTC.
While the industry has performed well, the uncertain global environment still continues and protectionist sentiments in key markets are concern areas, opined NASSCOM.
“Inflation is increasing the burden on employee costs and small companies need a supportive policy framework. It is disappointing that the government has not considered the needs of the small and medium enterprises.”

We summarise other  IT industry and analyst reactions which we received till late Feb 28:
Dinesh Kanabar, Deputy CEO and Chairman Tax, KPMG

The imposition of MAT on SEZ developers and units is retrograde as it seeks to impose tax on income received from investments made with a commitment of tax exemption. This is advancing the negative impact of the Direct Taxes Code and should have been avoided.The reduction of tax on foreign dividends received from subsidiaries of Indian Companies is welcome step facilitating eventual imposition of CFC regime.
Naresh Wadhwa, President & Country Manager, Cisco India and SAARC The emphasis on rural development, both through banking and telephony initiatives, is very welcome. I’m particularly thrilled about the allocation announced for rural telephony as this will surely give a fillip to boosting connectivity for villages. On the downside, we would have liked to see infrastructure status being given to rural healthcare initiatives as well, as they play a key role in promoting inclusive growth.

Ashok Chandak, Sr. Director, Global Sales and Marketing, NXP semiconductors India. The support for green and energy initiatives, especially in the areas of automotive and solar, is worth noting in this year’s budget. Reduction in duty on LEDs will help boost growth of this technology and energy efficiency, since cost is one of the chief inhibitors for adoption of new energy efficient products. Additionally, sops for production of electric and hybrid cars, as well as encouragement for solar lighting will also benefit industry. Unfortunately, the budget does not offer anything major for the Electronics and semiconductor industry in specific. We hope the government will address some of the issues to boost the local electronics manufacturing very soon as the Electronics Import bill is increasing at a rapid pace year after year.”

Hemant Joshi, Partner, Deloitte Haskins & Sells.
Government is targeting to provide banking facilities to all 73,000 habitations having a population of over 2,000 in this year. This can also be easily achieved through mobile banking considering the vast mobile penetration in rural India.Rural Broadband are included in an overall allocation of `58,000 crore (which includes other rural initiatives). The government plans to provide rural broadband connectivity to all 2,50,000Panchayats in three years.
MAT raised from 18 to 18.5%: This increase will take away benefits passed through reduction in surcharge.
Service tax on accrual basis: We believe that this could cost mobile operators around Rs60-100crores annually.

Krupa Venkatesh is Senior Director, Indirect Tax, Deloitte in India.
Contrary to optimistic expectations, the benefit of Section 10A of the Income Tax Act, 1961, granting exemption from tax to income earned from export has not been extended. In the context of Karnataka where most SEZs are in this sector, the introduction of Minimum Alternate Tax (MAT) on developers of Special Economic Zones (SEZ) assumes significance. Bulk of the refunds of input service tax claims, running into hundreds of crores, relate to the IT/ITES sector.

Manish Sharma, Director - Marketing, Panasonic India.
Specific to Panasonic India, there will not be any major changes in terms of product pricing as there have been no changes in duties. We welcome the reduction in excise duties on LEDs.
However, for a manufacturer, as we are exposed to open competition with the various ASEAN countries, some relief on raw materials and intermediate goods would have made our industry competitive globally.

Suresh Senapaty, Executive Director and Chief Financial Officer, Wipro The Finance Minister has identified all the right focus areas in this budget -- pruning fiscal deficit, higher allocation to social sector and education, focus on infrastructure, making Indian markets friendly to foreign investors, etc. Having taken a challenging target of 4.6% for fiscal deficit, the budget leaves little legroom for any slippages on account of crude and even the current under-recoveries are left open to be ironed-out by itself over the next 12 months. Reversal of promised benefits for SEZs by way of imposition of MAT and Dividend tax, increase in the rate of MAT which was already very high are clearly retrograde step.

Samir Dhir, Senior Vice President/Global Delivery Head & Head of India Operations, Virtusa Corporation The incentives provided to the infrastructure sector are welcomed as these incentives should increase capital investment in this sector.The proposal to reduce the surcharge on corporate income tax should spur additional investment. Levying MAT on SEZ developers and units operating in SEZ will negatively impact their cash flows.”

India Semiconductor Association (ISA) President, Poornima Shenoy ISA welcomes the Budget 2011 proposals which will stimulate manufacturing and innovation in India. The Government’s plans to come out with a National Manufacturing Policy and promote domestic value addition by rationalization and reduction of duty structures is very commendable. The increase in weighted deduction of payments to National Laboratories, Universities and Institutes of Technology to 200 per cent will give fillip to R&D activities. We can also expect creation of higher no of IPs through the Governments’ initiatives in setting up State and sector specific Innovation Councils. In addition, the efforts to strengthen the budgetary allocation to National Skill Development Council ( by Rs 500 crores -ed) will produce skilled workforce which can be readily deployed in the industry. Connectivity to all 1,500 institutions of Higher Learning and Research through optical fiber backbone by March, 2012 will enhance quality and delivery of education and research.

Feb 28 2011