Holiday on the MAT ?
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.
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.