Flooring the IT industry with MAT

THE MEASURE: The budget proposes introducing the minimum alternate tax (MAT) for companies besides increasing the dividend distribution tax from 12.5% to 15% cent (effective rate at 17.25% as they have to pay 15% surcharge) and extending the fringe benefit tax (FBT) to employee stock options (ESOPs).

The finance minister has exempted from service tax all services provided by technology business incubators. Those incubatees whose annual business turnover does not exceed Rs 50 lakh will be exempted from service tax for the first three years.

He also provided a pass-through status to venture capital (VC) funds only in respect of investments in VC undertakings in areas like biotechnology, information technology relating to hardware and software development, nanotechnology, seed research and development.

E-governance allocation has been increased from Rs 395 crore in 2006-07 to Rs 719 crore in 2007-08. The Centre has increased its support to state governments by allocating Rs 500 crore in 2007-08. Besides, Rs 33 crore has been allocated for a new scheme of manpower development for the software export industry.

THE CONTEXT: The finance minister reasons the effective rate of tax paid by all corporates, thanks to numerous tax concessions and exemptions was only 19.2 per cent. Hence, the proposal to extend MAT. But it comes at a time when the IT industry was expecting many sops including extension of the Software Technology Parks of India (STPI) scheme beyond 2009 besides reforming the duty structure to encourage domestic hardware manufacturing.

THE IMPACT: Analysts say MAT will apply to all corporate incomes and to income in respect of deduction claimed under section 10A and 10B of the Income Tax Act. MAT will affect the 100 per cent export oriented units (EOU) and those who come under the STPI scheme. Currently, these companies pay 14 per cent (surcharge included) dividend distributed tax and fringe benefit tax (FBT). This will affect the earnings per share (EPS) of IT companies immediately and as they are heavyweights in the Sensex. The industry is asking: Is the government hinting at an implicit commitment that the STPI scheme will be extended?

Bharat Varadachari, Partner, Ernst and Young, said, "Rather than giving an extension to the various tax holidays by 2009, the Minister has brought all companies under the tax bracket with MAT. Moreover, the increase in dividend distribution tax from 12.5 per cent to 15 per cent will be regressive." H V Harish, Partner, Grant Thornton, concurs with the view.

The good news is the additional investment in education and the training and the focus on education which will have a positive but longer term impact. The budget also provides a push for innovation and venture capitalist though with some reservations.