What about Software/ITES?

Software companies (the bigger ones) are perhaps bothered by 4 announcements of the FM in his Budget Speech.

1.  Export Earnings would come under Minimum Alternative Tax(MAT).  This will surely leave a dent in their bottomline whereas they were expecting the status quo to continue.  No wonder there is hue and cry from the leading players.

2.  Commercial Rent would attract a Service Tax and since our IT companies are hugely people intensive, this would swell their costs and hence impact their profits.

3.  ESOPs would come under the purview of Fringe Benefit Tax (FBT).  ESOPs have always been a bone of contention and this would make it even more so.  This would affect not only the top guys like Infosys or Wipro (where there is a profit-sharing plan already in place) but also in startups where ESOPs would be the way to attract and retain talent.  But for once, FBT has been applied in letter and spirit because ESOP is a Fringe Benefit.  Compare this to the the past where sales promotions were considered as benefit to employees (by a wild stretch of imagination perhaps).

4.  Dividend Distribution Tax has gone up.  This will leave lesser funds available for distribution to the shareholders.

Perhaps the FM has felt that this IT sector has had a great time so far and hence must partake in the nation building exercise by contributing to the exchequer.  But in doing so, he has clearly dented the enthusiasm of the industry that has  clearly put India on the world map and that is clearly regrettable.

I am really awaiting the reaction of NASSCOM and their strategy to get these removed or at least diluted.

While this would impact those players who are export-focussed (the majority) I am also surprised that he has not mentioned any initiative to spur the growth of the domestic IT Industry (both hardware and software) and the domestic market as well.  More on this later.

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1 Comment

  1. Anirudh said,

    March 18, 2007 at 7:09 am

    The important problems which are being faced by big companies are explained very detailedly and also in a short and crisp manner. I think there are more problems which, I think will be shown in the next blog about this topic.


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