Post Budget Sector Analysis

Budget Proposal

• Minimum Alternative Tax (MAT) would be applicable on IT companies (NO).
• Fringe Benefit Tax (FBT) would be levied on Employee Stock Option Plans (NO).
• Dividend Distribution Tax would be increased from 12.5% to 15% (NO).
• Increased allocation to Rs 7.2 bn as against Rs 3.9 bn in the previous year for ambitious e-governance project (NO).
• A new scheme of manpower development for the software exports industry has been launched with allocation of Rs 330 m (NO).
• Benefits of investment in Venture Capital Fund (VCF) has been extended to Information Technology sector, by giving a pass-through status to the same (NO).

Sector Impact

• The software industry, which is already in the dilemma over the continuing battle between SEZ and Software Technology Park (STP) exemption will now have to shell out more in form of MAT at an effective rate of 11.22%.
• Companies will also have to pay FBT on ESOP, which was seen as a good tool to contain high attrition in this sector.
• Large IT companies having good track records in paying dividends will be hit as rate of dividend distribution tax has been raised to 15%.
• Companies that have a good domestic presence will benefit from the e-governance project for which the government has increased allocation.

Company Impact

• TCS, Wipro and 3i Infotech are likely to benefit from the increased allocation to e-governance project

Sector Outlook

The Indian IT services market has witnessed strong growth over the past few years, on the back of increased offshore outsourcing initiatives from global corporations. More and more global corporations are trying to improve their cost efficiency and, thus, outsourcing their technology requirements to low-cost countries like India. In fact, it is the offshore component that has been seeing impressive traction, driven by increasing acceptance of the ‘global delivery model’. The demand now seems to be shifting from low-end services to high-end ones, like IT consulting, package implementation and systems integration.