A Day After ‘The Day’…reflections On Union Budget ’07 …an It Perspective

As Union Budget '07 is presented ,it gave me an idea to summarize as per software sector is concerned.

First,few relavant bits from Budget speech.

Excerpts from Union Budget ‘07:

Mr. PC elaborating the Tax proposals at the country’s disposal in his speech says ‘MAT should therefore apply, as far as possible, to all corporate incomes. Hence, I propose to extend MAT to income in respect of which deduction is claimed under sections 10A and 10B of the Income tax Act .…’ .

And also ‘I propose to bring ESOPs under FBT. The value of the fringe benefit will be determined, in accordance …..’.

…………..  and so on.

Budget measures pertaining to software industry could be summarized as follows:

MAT would be applicable on IT companies.

• FBT would be levied on ESOPs.
• Increased allocation to Rs 7.2 bn as against Rs 3.9 bn in the previous year for ambitious e-governance project.
• A new scheme of manpower development for the software exports industry has been launched with an allocation of    Rs 330m.
• Benefits of investment in VCF have been extended to Information Technology sector, by giving a pass-through status to the same.

According to ASK-Raymond report: (source www.MoneyControl.com) the Overall Impact is Negative for IT sector.

The implementation of MAT needs more clarity. The effect will vary from company to company. However, Infosys has gone on air citing a negative impact of about 1.5% on net margins.

Given the supply constrained scenario, it is negative for companies. However, most large companies have stopped giving additional ESOPs and are only giving stock on exercise of options given previously.

Positive for companies like Educomp Solutions and NIIT Ltd.

Positive for companies involved in the e-Governance and defense space (due to the offset clause) like CMC, TCS, etc.

Few Neutral Reactions:

"With respect to MAT, though there is an increase in coverage of MAT for 10A/10B companies, there is the facility of carry forward of MAT which is available to all companies. So in effect we will not have much impact on profits." -- Mr.Amar Chintopanth, Executive Director and CFO, 3i InfoTech.

Market reaction:

"We are dismayed at the proposal to extend MAT on export incomes which are exempt under Sections 10A and 10B. This is a regressive step that withdraws government's commitment to provide tax incentives till 2009, on the basis of which companies have made their business plans and investment decisions. This could affect investor confidence and growth in this sector." -- Mr. Kiran Karnik, President, Nasscom.

Information Technology stocks, including that of giants like Infosys, TCS and Wipro , were the most deserted counters on the Dalal Street a day after ‘The Day’, after the Union Budget proposed measures that will increase the tax burden on software companies.

 The index plunged to close at a low of 4,869.99 points, 302.41 points down from the previous close of 5,172.40, after Finance Minister P Chidambaram announced proposals like bringing ESOPs under FBT regime, imposing Minimum Alternate Tax on companies and increasing dividend distribution tax.

Summary:

Overall, we can say that this year budget had got mixed reactions from various corporate heads. Inclusion of IT industry under MAT had a great opposition. Bringing ESOPs under FBT regime had also drew great opposition from IT sector.

 Ask-RJ report revealed that implementation of MAT needs greater clarity. It is positive impact on IT companies involved in education and e-Governance projects.

There is no change in the IT hardware industry, so prices remain the same. ALAS…. There is a reason to feel happy about with the budget as far as a layman is concerned. .