Reality Check India

Holiday on the MAT ?

Posted in Uncategorized by realitycheck on March 6, 2007

The Union Budget recently proposed to bring the IT Services companies under the MAT (Minimum Alternate Tax) regime. It is important to note that the MAT is not new, it has just been extended to the IT companies who are enjoying tax holidays under Sec 10A ,B of the IT Act.

See earlier posts on the IT Tax issues ( Extending tax holidays to 2019 , Vote Bank (I) Pvt Ltd, Paging Kiran Karnik, Everyone loves a holiday )

The whole story is one of mind numbing complexity. Basically, there are a large number of companies in India who use the rules in the IT Act to compute income and the tax on that income, but they use the provisions in the Companies Act to compute their profit and loss account. The effect of this is that while they showed profits as per the provisions in the companies act and even declare dividends to their shareholders, the income tax paid is zero or very little. The most important reason for such discrepancy was the various exemptions claimed.

Let me try to see if I can pull this together. For an Indian company the effective tax rate now can fall between these two bounds.

1. Corporate tax – at 30% (add the 10% surcharge + 2 % education cess + 1% OBC education cess) – it is at 33.9% 

2. Minimum Alternate Tax – at 10% (add the 10% surcharge + 2% education + 1% new OBC quota cess) – it is at 11.3%

This means all IT companies who are paying less than 11.3% on their book profits now have to cough up the difference. Some companies such as Infosys are paying around 11.1%  already ($70M tax on $630M profit)  (see their balance sheet here) . So their exposure will be minimal.  The hit on smaller players is going to be large because they still have many units under the STPI tax holiday (Sec 10A,10B). Many of them may have to go from 0% to 11.3% this year.

Here is an analysis of some top IT companies tax exposure

For HCL Technologies, the MAT burden will be around Rs 63.41 crore as it has paid tax of Rs 10.67 crore in 2005-06 at the rate of 1.63 per cent of the pre-tax profit of Rs 653.83 crore. Cognizant Technologies will fork out Rs 38.64 crore, Teledata Rs 13.85 crore, Rolta India Rs 11.93 crore and Tech Mahindra Rs 9.77 crore. 
 
Smaller companies such as Mastek, Aztec, MphasiS, Cranes, i-Gate too will be adversely impacted as their effective tax rates are between 5-10 per cent .

Source : Business Standard

The MAT is just a side story. The real question is what is going to happen after the assessment year 2008-09 – when all tax holidays under Sec 10A, 10B lapse. The FM did not make any noise about that in this budget. While the corporates must be willing to pay the appropriate taxes, the government must offer clarity. How can any business forecast or arrange financing if such a huge policy is left in limbo ?

While many are hoping for SEZs to replace the STPI tax holidays. Some are just resorting to mind-reading.

The proposal by finance minister P Chidambaram to extend the minimum alternate tax (MAT) to information technology companies in Budget 2007-08 could well be the government’s way of telling them that the tax holiday on export profits would continue beyond 2009.

Source : Financial Express

Whenever, I talk about Indian IT and its tax relationship with the government – I take the example of the bus services some of these top companies run.

Commuting from work to office via public transport is something the government must provide or atleast facilitate. From Seoul to Malaysia to Singapore to Thailand to the subways of NY, Moscow, and almost all of the world – the bulk of employees arrive to work via public transport. Today, in India you have companies like Wipro operate miniature transit systems for their employees. They even have bus route numbers like 17A, 5D etc.  Why did this happen ? Shouldnt  employees just hop on to a train or bus at stops in JP Nagar, Madivala, Koramangala and alight at the Electronics city campus ? Why isnt this happening ? Is it because the local governments simply do not have the resources to roll out such infrastructure projects? Is it because the most dynamic sectors do not contribute to the tax kitty ?

Ultimately, the tax policies must favour growth and competition. Today, a small company must offer transit services, lifestyle facilities like gym, basketball courts, food courts, etc.  We need infrastructure services that benefit all – not just IT employees.

I would measure the success of the Indian IT story by how fast these private transport services disappear from the roads.

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11 Responses

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  1. Barbarindian said, on March 6, 2007 at 3:07 pm

    I think PC gets off on the fact that his sudden statements can send jolts to the stock market. Or it could just be his cronies are making a bundle on insider trading.

  2. Goldstar said, on March 9, 2007 at 3:33 am

    RC,

    I read somewhere among the host of budget articles that STPI units shifting to an SEZ would not get the tax holiday that a new unit inside an SEZ would get . That will be a whammy for the IT companies (well-deserved, I might add 🙂 ).

  3. Goldstar said, on March 9, 2007 at 3:43 am

    RC,

    Here it is:

    http://inhome.rediff.com/money/2007/mar/02bud9.htm

    Excerpts:
    The new provisions say only a new unit or an enterprise in a SEZ can claim tax benefits under the Section 10A and Section 10B (which deals with tax holidays) of the I-T Act

    Says Rohan Phatarphekar, Partner & Head of Tax & Regulatory Services in Grant Thornton, “This would stop to a large extent the movement of assets/business from the existing units, for instance migration from the Software Technology parks of India to the SEZs.”

    “But if a company having a unit in a STPI decides to move the unit/business to a SEZ, just because its tax holidays are coming to an end, then it would not get tax exemption,” says Phatarphekar.

  4. Barbarindian said, on March 10, 2007 at 2:09 am

    A most foolish idea.

    Whenever there is an arbitrage opportunity, monies will move. What do you think is gonna happen with this rule? I guarantee you will come up with the answer in 15 seconds or less.

  5. Aishi said, on March 11, 2007 at 6:45 pm

    Hi RC

    I came across your blog while trying to catch up on MAT and what it means to an IT company, I must say that i liked your article a lot, especially beacuse of the language which was very lucid and really helped to put a lot of things into perspective for a guy with any knowhow on taxes like myself.
    There is one thing however which i am a bit confused about and although it might sound very silly to pros like you, i will none the less go ahead and ask it.
    I couldn’t figure out why it is that some BIG IT comps like Infy are paying 11% tax already while the smaller comps are paying almost 0% taxes?

    “Some companies such as Infosys are paying around 11.1% already ($70M tax on $630M profit) (see their balance sheet here) . So their exposure will be minimal. The hit on smaller players is going to be large because they still have many units under the STPI tax holiday (Sec 10A,10B). Many of them may have to go from 0% to 11.3% this year”

    Will be really thankful if you could explain me the same,

  6. realitycheck said, on March 15, 2007 at 3:45 am

    Aishi,

    >> I couldn’t figure out why it is that some BIG IT comps like Infy are paying 11% tax already while the smaller comps are paying almost 0% taxes? >>

    The principal way IT companies get tax benefits is under the STPI scheme (Software Tech Park). Under its provisions, tax holidays are available for 10 years under Sec 10A/B of the Indian IT act. Large companies have several campuses or offices that are more than 10 years old. Income from these campuses are subject to taxation unless they have negotiated some other concessions.

    Small companies are almost fully exempt because their offices may still be under the 10 years STPI tax holiday.

  7. Aishi said, on March 15, 2007 at 6:50 pm

    Hey RC!

    Thanks for replying but why is that the taxes the Bigger companies are paying are around 11-12%? I mean if some of these companies have offices more than 10 years old or outside the STPI scheme, then shouldn’t they be paying the present Corporate tax at somewhere near 30%?

    I keep hearing that the 11-12% tax that these big companies are paying has something to do with them having large offshore revenues whereas since the smaller companies have more india based revenues they pay around 0% tax. I really couldn’t figure out the logic behind this and hence am not ruling out the possibility of this being completely incorrect.

    Anyway, will be glad if you could shed some light on it.
    thanks again
    Aishi

  8. realitycheck said, on March 16, 2007 at 3:51 am

    Aishi,

    >> I mean if some of these companies have offices more than 10 years old or outside the STPI scheme, then shouldn’t they be paying the present Corporate tax at somewhere near 30%? >>

    The 11% is the effective tax rate of these companies, it is from a mix of locations still under STPI and those that have come out of it. If a unit comes out of STPI tax scheme, the standard 30% corporate income tax is applicable, unless some other benefits have been negotiated. New campuses that are still under STPI will not pay any income tax (0%).

    The way income from these units are calculated is probably very complicated. A company would likely want to move commercial activity to units under tax holidays and increase administrative work at units outside of the tax holiday. I am afraid I dont know the details behind this, maybe someone can shed some light on this.

    Smaller companies that serve mostly Indian customers have to pay more because the STPI scheme only extends benefits upto 50% (of export earnings) business in the local market (called DTA – domestic tariff area).

  9. Girish said, on April 4, 2007 at 7:11 am

    Dear Sir,

    Please reply to me whether a Trading unit in SEZ can claim income tax exemption u/s 10A or not.
    Regards

  10. If Murthy can be why not muthry??? said, on April 17, 2007 at 9:36 pm

    INFY TAX: Need help from tax experts!!!!!

    It is well know that INFY does not pay any income tax in India. 11.69% effective tax rate of INFY has a secret. 80% of this tax , if you pore through INFY’s balance sheet , is international tax. Since INFY operates on branch mode rather than in …

  11. ROHIT SHAW said, on May 4, 2010 at 5:45 am

    SIR PLEASE PROVIDE ME WITH THE FULL DETAILS OF PROVISIONS OF SEC 10A (STPI SCHEME)IN ORDER TO CLAIM EXEMPTION UNDER IT ACT


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