Email
Print
ShareBangalore: Software companies will have to bear higher tax costs this fiscal, with the termination of tax benefits under the Software Technology Parks (STP) scheme almost a certainty.
The industry expects the government to pull back the STP scheme, which provided a 10-year tax holiday to information technology (IT) services export firms.
Last year, the scheme was extended by a year to March 2010. But with improvement in the global market environment in recent months, the industry does not expect the expiry of the scheme to be pushed back any further.
Partha Iyengar, vice-president and research director of Gartner, said the withdrawal of the tax perks will impact all the legacy software companies, including Tata Consultancy Services (TCS), Infosys Technologies and Wipro Technologies, working under the old STP regime.
"It (jump in tax rate) will depend on what quantum of business is under the old regime of STP and how much of it under the new SEZ (special economic zone)," he said.
According to Barron's, a leading business publication in the US, since the Infosys was among the first companies to avail of the tax gains from the scheme, it may see expiration of the tax benefits earlier than its rivals. "Infosys was an early adopter of certain tax benefits, making it face expiration of these perks earlier than its peers," a report in the publication said.
Once the scheme expires in March 2010, the tax rate of Infosys, India's second-largest tech services company is expected to move up to 25% from 13% in FY09.
This, analysts believe, will put pressure on the company's margins, already under strain from wage hikes announced recently.
T V Mohandas Pai, human resourcehead of Infosys, said his company's tax rate was already in the region of 20% and a slight increase in tax rate would not impact margins drastically.
Gartner's Iyengar, too, feels Infosys is well-prepared for the new tax regime. "Its (expiry of STP scheme) impact is not going to be significant (on Infy's margins) as the company is using cost levers to offset it (impact of higher tax rates)," he said.
In FY09, 82% of Infosys' revenues came from STP operations, 11% from SEZ and 7% attracted normal corporate tax rates levied in India.
The revenue break-ups of Wipro and TCS are more or less on similar lines.
A senior executive of Wipro Technologies, the third-largest IT firm, who did not want to be named as the company is in a silent period, conceded that they would be impacted by the expiry of the STP scheme. He, however, could not give the exact percentage rise in the tax rate of the company.
"Some part of our business would be affected but we have moved a large part of our business to SEZ. That would provide some relief to us," the Wipro executive said.
Under the SEZ Act, 2005, units operating in such zones are eligible for a deduction of 100% of profits from exports of services in the first five years and 50% in the next five years.
