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Indian IT firms shrug aside EU tax concern

By BS Reporters in Mumbai/New Delhi
November 17, 2009 16:00 IST
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Even as the Indian IT industry is studying the fine print of the European Union (EU) to expand the scope of value-added-tax (VAT) from January 1, to include services like back-office operations, call centre work and administrative services delivered from non-EU nations (including India), it does not appear to be unduly perturbed.

Europe, including the UK, contributes about 20-27 per cent of Indian IT companies' revenue. For instance, Europe and the UK contribute close to 27 per cent (July-September quarter) of India's largest IT services provider, Tata Consultancy Services (TCS), yet, it does not see any impact.

"There is no impact on TCS, since clients of the European countries, where we have subsidiaries, were paying VAT on all onsite and offshore services. Hence, this new law will have no impact on our financials from this perspective," says S Mahalingam, chief financial officer, TCS.

He adds "the main change is that VAT from next year will be charged at the point of delivery of services, instead of the point of origin of services. Hence, there is no additional tax, just the point of levying of the tax has changed".

"It is not a new event. These kind of changes keep on happening and we are taking this up with clients and the regulatory body. As of now, there is no major impact. Even if this (VAT) does get passed, most of the clients can take input credit for the applicable VAT against the VAT on their output," says Rostow Ravanan, chief financial officer, MindTree. Europe contributed 21 per cent to MindTree's revenue at the end of the second quarter of FY10.

Farid Kazani, group CFO and finance director of Mastek, which has close to 50 per cent of its revenue from the UK, concurs that the tax will not have an impact on the company's financials.

"This is applicable to certain verticals like banking, finance and insurance - all the other will get offset. Also, what this means is that some of the services that were not liable for taxes, like back-office operations, call centre work and administrative services, will come under the ambit of the tax. For Mastek, this does not mean anything. As our customers were anyway being charged and getting refunded for it," adds Kazani.

Nasscom President Som Mittal says: "We are still getting into the details, but Indian firms will have a minimal impact because of this. It seems the tax is being used to promote standardisation and unification of vendors across EU."

Nasscom also maintains that the onus of remitting taxes for VAT will now be on the consumer of services through self-assessment after January 2010. A second point to note is that for the services rendered by the Indian IT-BPO industry to customers based in the EU member states, the VAT applicability differs from state to state. With the new rules, most of the discrepancies will be harmonised.

"Thus, the changes are procedural in nature and the impact on the industry would be marginal. The harmonisation of rules will, in fact, improve procedural efficiency," a Nasscom statement said.

Analysts tracking the sector, too, feel it was still too early to talk about the legislation and there was room for clarifications.

"There are a couple of things that are not clear. One, whether this is applicable to both EU and non-EU firms? If it is only for non-EU firms, it is a discriminatory move. Two, since this is part of direct tax regime, does it have a system of tax credit in place, as this will allow the vendor to recoup from client as it is VAT? And finally, any increase in direct tax is always paid by the end customer," says Siddharth Pai, managing director and partner, TPI India.

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BS Reporters in Mumbai/New Delhi
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