Minimum alternate tax to eat into profits, stocks hammered

“This (step to bring IT companies under MAT) is regressive and withdraws the government’s commitment to provide tax incentives till 2009, on the basis of which companies have made their business plans and investment decisions,” said NASSCOM President Kiran Karnik.

But some analysts feel the MAT impact isn’t so severe. “Under Section 10A/B, export profit is tax-exempt in India. Actually, IT companies pay tax on onsite business done outside India, as per the tax laws of the client country. They do not pay tax on offshore activity. The MAT they will now pay on exports will be offset by credit of tax paid outside India,” said Sunil Godhwani, CEO & managing director, Religare Enterprises.

For example, Infosys already pays more tax than MAT and now will avail unutilised tax credit. “We believe it is a knee-jerk reaction and one should be positive on frontline IT companies whenever their stocks dip. We believe BPO companies with outsourced offshore business models will be hit,” he said.

Infosys CFO V Balakrishnan said, “MAT will hit companies in the range of 1-3 per cent, but companies that pay tax outside India can benefit from double taxation avoidance agreements,” he said.

But it is the imposition of fringe benefit tax on employee stock options that hurts more. “IT this year will create 380,000 jobs, the largest number of jobs in the organised sector in India. The FBT levy adversely affects one of the major employee retention tools for the IT sector,” said Kris Gopalakrishnan, president, joint MD and COO, Infosys Technologies.

These views are echoed in the pharma industry. Said Kiram Mazumdar Shaw, CMD, Biocon: “We are disappointed because ESOPs are one way of cutting attrition.” Ashok Shinkar, director of pharma company Wanbury said, “We were actually expecting the FBT to go, but its scope has been enlarged instead.”