IT firms such as TCS, Infosys and Wipro expect their effective tax rates to go up in the coming years as more of their delivery units come out of Software Technology Parks of India. This would further impact the net profit of these companies, already under pressure because of the global economic crisis. The actual taxes paid by a corporate divided by the net taxable income expressed as a percentage, gives the effective tax rates. The vendors setting up delivery units in Software Technology Parks (STPs) enjoy a tax holiday for 10 consecutive years. However, after that period, they are no longer eligible for the exemption. The latest Budget gave the STPI scheme an extension of one more year; it will now end in March 2011. The extension will not benefit units that are more than 10 years old.
Infosys Technologies, which had an effective tax rate (ETR) of 17 per cent last fiscal, expects the ETR to touch 20 per cent this financial year. “It is a natural conclusion that the ETR will go up in the next few years as more of our units come out of STPI,” said Mr V. Balakrishnan, Chief Financial Officer, Infosys. The company estimates its ETR at 24-25 per cent in the next fiscal. “However, it is difficult to say because the tax rate would depend on how much of our growth will go into the SEZs,” Mr Balakrishnan added.
For many companies, most expansion is happening in SEZs, which provide tax benefits on all profits from export for the first five years, and tax breaks for 50 per cent of profits from exports in the next five years. However, some companies might find it difficult to start work in an SEZ because it is more cost-intensive. Country’s largest software exporter TCS also expects its ETR for the fiscal to rise from 14.34 per cent in 2008-09. “We expect it to go up to 17 per cent by the end of the current fiscal. Apart from this (the STPI ceiling), we do not see any other reason for the effective tax rates to go up,” Mr S. Mahalingam, CFO and Executive Director, TCS, said.
For the quarter ended June 2009, Wipro had an ETR of 15.5 per cent. “We expect the ETR to be in the range of 15.5 per cent for the remaining quarters. For fiscal 2011, we expect it to increase 100-200 basis points,” said a Wipro spokesperson.
Apart from the top companies, the small and mid-size firms also expect their ETR to go up. MindTree Ltd, which had an ETR of 12-13 per cent in fiscal 2009, expects it to go up by two percentage points to about 15 per cent this fiscal. “It is a problem for us. Many of our units are more than 10 years old,” said Mr Rostow Ravanan, Chief Financial Officer, MindTree. About 60-65 per cent of MindTree’s revenue comes from STPI units. “About 5-10 per cent of these are comparatively new units. The rest have come out of the tax benefit scheme effective March 2009. The impact on the net profit would be two percentage points,” Mr Ravanan said.
Sonata Software also expects its ETR to go up, but marginally. “We have some of the units coming out of STPI. But for us many are still within STPI,” said Mr B. Ramaswamy, Managing Director, Sonata. The effective tax rate currently is about 8-9 per cent, he added.
