1 Mar 2011: Budget 2011 - Smaller IT cos to feel tax pinch more, take margin hit
India’s small and medium-sized IT firms will be hit hard by the decision to end tax exemption for software units and impose MAT on SEZ units.
The budget did not extend tax exemption for units registered under the Software Technology Parks of India (STPI) making export income taxable for them from fiscal 2012. Software units in SEZs which were exempt from Minimum Alternate Tax, have now been brought under the tax’s purview.
1 Mar 2011: “US turnaround will revive indian IT's fortunes”: Jyotivardhan Jaipuria, MD, Bank of America-Merrill Lynch
“The tax holiday for Software Technology Parks was not extended beyond March, as was anticipated by the smaller IT firms. Consensus estimates had factored in the expiry of the tax holiday.
On the other hand, the Minimum Alternate Tax (MAT) on special economic zones will impact cash flow negatively. But IT companies will offset the earnings impact by creating MAT credit asset, which can be carried forward for 15 years, given that they expect their tax liability to be higher than this deferred tax asset during the period.
We are overweight on the software sector due to its improving growth outlook. Our optimistic stance is driven by three key factors. First, the US recovery is helping provide a much better environment for software companies. The banking, financial and insurance vertical is witnessing demand driven by regulatory compliance, risk management, business rationalisation, etc. The energy vertical is also seeing regulation-related activity while the telecom vertical is seeing some growth led by cost cutting, modernisation and vendor consolidation-related spend.
Secondly, global outsourcing continues to gain share in new areas like infrastructure management services (IMS), healthcare and public sector and new markets like continental Europe. IMS and BPO are forecast to grow at twice the average offshore market growth rate.
On the other hand, the Minimum Alternate Tax (MAT) on special economic zones will impact cash flow negatively. But IT companies will offset the earnings impact by creating MAT credit asset, which can be carried forward for 15 years, given that they expect their tax liability to be higher than this deferred tax asset during the period.
We are overweight on the software sector due to its improving growth outlook. Our optimistic stance is driven by three key factors. First, the US recovery is helping provide a much better environment for software companies. The banking, financial and insurance vertical is witnessing demand driven by regulatory compliance, risk management, business rationalisation, etc. The energy vertical is also seeing regulation-related activity while the telecom vertical is seeing some growth led by cost cutting, modernisation and vendor consolidation-related spend.
Secondly, global outsourcing continues to gain share in new areas like infrastructure management services (IMS), healthcare and public sector and new markets like continental Europe. IMS and BPO are forecast to grow at twice the average offshore market growth rate.
Thirdly, margins are likely to be maintained, helped by scale and pricing showing an upward bias.
Lastly, company-specific factors like higher productivity, broadening of the employee pyramid and investments beginning to pay off are also helping margins. We think the sector can see a top line and bottom line growth of over 20%, which should drive stock performance.”
28 Feb 2011: Union Budget 2011: MAT impact on India's $60 billion IT sector
India's $60 billion IT sector is preparing to cope with impact of higher taxes after the finance minister proposed higher minimum alternat tax (MAT) for units operating in special economic zones (SEZ).
The IT industry is expecting an impact after minimum alternate tax was introduced on special economic zones (SEZs). SEZs had a 100% tax exemption for a period of five years and 50% exemption for another five years. SEZs will not have to pay MAT at 20% on book profits.
"There will be a significant impact on both SEZ developers as well as the units operating in SEZs. Earlier companies enjoyed a 30% tax break, imposing 20% MAT will reduce the saving of companies to 10%. The attractiveness of SEZ units will drop significantly," Hemal Zovalia Executive Director tax and regulatory service KPMG said.
The IT industry is expecting an impact after minimum alternate tax was introduced on special economic zones (SEZs). SEZs had a 100% tax exemption for a period of five years and 50% exemption for another five years. SEZs will not have to pay MAT at 20% on book profits.
"There will be a significant impact on both SEZ developers as well as the units operating in SEZs. Earlier companies enjoyed a 30% tax break, imposing 20% MAT will reduce the saving of companies to 10%. The attractiveness of SEZ units will drop significantly," Hemal Zovalia Executive Director tax and regulatory service KPMG said.
Large IT players such as TCS, Wipro and Infosys have moved a large part of their operations to SEZs. "To claim MAT on SEZs is conceptually wrong, this will have a cash flow impact. Also there is now MAT on development of SEZs and this will discourage the development of these zones," Rostow Ravanan, chief financial officer of Mindtree said.
The IT industry had also been seeking a roll back in MAT after it was increased from 15% to 18% last year. This year’s Budget has increased this to 18.5%.
The IT industry had also been seeking a roll back in MAT after it was increased from 15% to 18% last year. This year’s Budget has increased this to 18.5%.
28 Feb 2011: Union Budget 2011 impact on IT sector: Angel Broking
The Union Budget 2011-12 was a low key affair for the Software Sector . The Budget did not mention extension of fiscal benefits under the STPI Scheme for Export of Software Services, which is due to expire in FY2011. Plan allocation for School Education increased by 24% to Rs 52,057cr in FY2011-12. This would boost business opportunities for the IT-Education companies in terms of ICT and PPP in K-12 and Vocational Segments. viz. Educomp, Everonn and NIIT Ltd. Overall, the budget was Neutral for IT sector.
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