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The IT/ITES sector will benefit from removal of FBT and extension of STPI scheme for another year, but will be impacted due to increase in MAT from 10% to 15%
Budget provisions
Industry expectations - fulfilled
Most of the major industry demands were fulfilled. Following were the industry expectations:
Industry is recommending that the tax exemption for STPs continue for another 10 years (beyond 2010) so that companies can continue availing of benefits and have the time to adjust to the SEZ framework, which will take the next 2 or 3 years to really get operational.
Also the extension will help mitigate impact of the recession and protectionist measures being adopted globally. This is particularly important for Small/Medium enterprises to facilitate their continued growth, provide parity with incentives under the SEZ scheme and encourage industry to move into Tier 2/3 cities.
The Interim Budget had indicated amendment in Section 10AA of Income Tax Act, 1961 regarding the anomaly in calculation of SEZ export profits. Currently, SEZ export profits are required to be computed with reference to the total turnover of the assessee, creating a discriminatory structure. The industry recommends that the necessary changes in the Act need to be implemented.
The industry recommends removal of multiplicity and inequity of taxes; it has requested the government to resolve duplicity of indirect taxes for packaged software; provide clarity in policies for service tax refunds, develop uniform approach on transfer pricing and amend FBT on ESOPs.
The industry recommends initiating time bound and outcome based implementation of the already-approved e-governance programs and evolves appropriate new programs. The Industry recommends implementing the announced unique identity card for each citizen.
The industry recommends building of Education & Skill for the Industry. It recommends allocation of resources for scalable programs for nation-wide faculty development program, aligning curriculum with employability and developing institutes focused on R&D.
Budget impact
The removal of FBT would be earnings accretive to the IT Companies. IT companies are dependant on headcount for their revenues and fringe benefits forms a part of the compensation payable to employees.
The extension of the sunset clause i.e. exemption u/s 10A and 10B for one more year i.e. upto FY2010-11 would be earnings accretive as compared to the scenario if the clause would not have been extended.
The increase in the MAT rate from 10% to 15% and the extension of the carry forward period from 7 years to 10 years would be earnings neutral (current tax would increase compensated by increase in deferred tax asset) and cash flow negative. The Company would have to pay tax at higher MAT rate but would get credit for the same in the future.
The exemption of the value of right to use packaged software would give some relief to the product centric Companies. The IT majors would not much be impacted.
The clarification regarding computation of exempted profits in the case of units in SEZ comes as a relief for IT Companies as going forward the contribution from SEZ units would increase.
Stocks to watch
Infosys Technologies, TCS
Outlook
On an overall basis, the budget proposals will have a positive impact on the IT-ITES companies. The IT-ITES industry is going to difficult times with the slowdown in the global economies. The volume growth is now a worry. The Companies have stopped recruiting and are sitting on bench strength. The extension of sunset clause and abolition of FBT would give some relief to the sector.
With talks of the demand bottoming out and recovery of IT spent with some recovery in the US Economy, there could be signs of a recovery in the outlook of the IT Companies. The performance of the September 2009 and December 2009 quarter hold the key as to whether there is any revival in demand.
