At 10.45 AM on Budget day, half a dozen executives from mid and small tier technology firms gathered in a CII show at a Bangalore hotel. They wanted to hear the finance minister dole out incentives for a sector that would create 4,00,000 jobs this year, boost the country?s much needed exports revenues and play a significant role in checking leakages in the government?s social schemes. What they heard had them huffing and puffing.
The national Press dubbed it a ?double whammy??the $76 billion IT-BPO sector was slapped with a minimum alternative tax (MAT) on SEZs while the income-tax holiday under sections 10A/10B (STPI) were withdrawn.
While the end of tax exemptions?the benefits expire on March 31 this year?will increase a company?s tax rates substantially, MAT on SEZ units will tie up a firm?s cash flows. MAT is an advanced payment of tax; a company has to pay 18.5% of its ?book profits? as MAT. If a firm?s actual tax is 15% of book profits, the difference of 3.5% is carried forward for 10 assessment years and can be set off against the actual tax/book profits if the same is in excess of the MAT rate.
More taxes may not impact the handful of multi-billion dollar IT services firms India has, but it would certainly be painful to mid-tier and smaller firms, many of whom are struggling to remain relevant in a re-set world. The post recession era has seen vendor consolidation and a majority of the lucrative deals have been going to the larger firms. While BPO has always been clubbed with IT, both are different ballgames. The BPO industry is much younger compared to the IT sector, is capital intensive and is facing neck-break competition from other emerging countries that are spreading out the red carpet of incentives at will.
Will the new announcements curtail investments to India? May be not, as India would still remain the destination of choice to scale up operations given its favourable demographics. But consider this: BPO firm Intelenet Global services operates out of six countries?many of them have tax holidays. To maintain its margins now, the company may have to increase its India price by 3% to 7%. This would put India at a competitive disadvantage versus other locations.
The tax payable by mid-tier IT services firm Mindteck in India is likely to increase by 60% in the coming years with the withdrawal of the STPI tax holiday scheme. Sonata Software?s average tax rate is between 9% to 12% now. This should progressively rise to between 16% and 18% as the firm expands into SEZs. More taxes for smaller firms mean they would have less and less of cash to re-invest in the business, upgrade or expand their infrastructure using internal cash accruals.
BPO firms would now be less willing to expand in tier II and III towns, scuttling the development of these regions. Shanmugam Nagarajan, co-founder and chief people officer of 24/7 Customer says that the SEZ scheme is not a true alternative to STPI given the fact that SEZs are developed only in tier 1 cities. BPOs who want to expand to smaller towns and rural areas cannot benefit from the SEZ scheme. ?This will discourage BPO companies from spreading outside tier I cities, increasing the disadvantages of the industry like fight for talent, wage inflation and infrastructure congestion. This would also diminish the opportunities the industry can provide the people outside these developed cities,? he notes.
For many, the imposition of MAT on SEZ units raises a far more pertinent and ethical question?can you trust the government? Post the Budget, many industry chiefs told FE that the imposition of MAT showed lack of stability in the tax laws and lack of intention in the government to honour commitments. The SEZ scheme was announced as an act of Parliament and last year it was clarified that under direct tax code (DTC), SEZ units set up till 2014 will continue to get profit linked tax exemptions. SEZs were meant to be tax free for five years and units could claim 50% tax exemption for the next ten years. ?The MAT imposed on SEZs raises the issue of trust. The government had committed to a full tax holiday. It cannot impose a tax now even though it is only a cash flow issue,? Mohandas Pai, board member of Infosys, had commented.
Many experts and industry heads that FE spoke to were worried about India?s eroding attractiveness as an offshoring destination versus other BRIC nations?Brazil, Russia and China. KPMG executive-director Naveen Aggarwal notes that the IT-ITeS sector in Brazil has been given various exemptions through taxes and duties on adhering to the required policies. ?In Russia, future seems promising with government support on exemptions and the development of software technology parks. In China, the government has given preference to the IT-ITeS sector in the form of various exemptions on taxes and duties on setting up units in SEZs,? he says.
Purushothama Reddy, associate VP, finance at Omega Healthcare Management Services, says that destinations like China and Philippines are more attractive internationally now. ?Philippines has emerged top BPO/KPO destination as the government there offers higher tax incentives and business-friendly policies. IT and outsourcing enterprises in the Philippines enjoy a 100% tax exemption for up to eight years. This island country also provides cost benefits for infrastructure, operational expenses and business continuity. In other words, India may no longer that attractive to investors as it used to be,? he says.