Budget 2010: Sunset on STPI, EOU schemes

Excerpts from India Business Hour on CNBC-TV18 Watch the full show » RELATED NEWS Direct taxes: Industry expectations from Budget 2010

In an interview with CNBC-TV18, S Mahalingam, Executive Director & Chief Financial Officer of Tata Consultancy Services (TCS) and Bobby Parikh, Managing Partner of BMR & Associates, spoke about the impact of the STPI and EOU benefits lapsing after 2011 and the the key takeaways for the IT sector from Budget 2010.

Here is a verbatim transcript of an exclusive interview with S Mahalingam and Bobby Parikh on CNBC-TV18. Also watch the accompanying video.

Q: The sun has finally set on the STPI and EOU schemes. Is there much to write about, for the IT sector as far as the Budget was concerned?

Mahalingam: This one was never there. It was an expectation as far as the Budget proposal was concerned. This Budget has been good from a different perspective. If you take the Special Economic Zone (SEZ), the anomaly that was there in the 10 AA, which was given effect to with prospective effect last year. He has not given effect to that with retrospective effect. That is a very positive thing as far as the IT sector is concerned.

Q: Is there still a grey area of how the tax statement is going to work for SEZs?

Parikh: Not at this point of time. This area was unclear. It was in terms of whether you had a SEZ unit that you use the turnover from that unit as the numerator and what you used as the denominator was unclear.

It was clarified in the last Budget to say that you don't look at all your businesses but you look at that undertaking itself, which was what was desired. When they clarified it last year, they did it with effect from last year whereas these units had been set up several years before.

So they have clarified that it will have operation from the time that the SEZ regulations came into play. In that sense there is no longer a controversy in terms of what the taxability of SEZ should be.

Q: While you are right that the extension as far as STPI benefits were concerned were a hope as far as the industry is but NASSCOM as a body has been lobbying for an extension of STPI scheme largely on account of the small and medium industries. The big boys are already in SEZs. They have already said that they don't really care if the STPI benefits are done away with. How do you actually see this as impacting the growth of the domestic IT business?

Mahalingam: There will definitely be some effect. There were two issues as far as this was concerned. One was the tier II and tier III cities on how we were going to handle that. You cannot go and set up an outfit for about 8,000-10,000 people at that place.

Therefore, there is going to be an effect. As far as small and medium are concerned, now the only option that they have in terms of growth is to move into an SEZ lease space. Many of these SEZs are outside of town. In a sense that would lead to some additional costs and so on.

These were two basic reasons why we had taken it up through NASSCOM. As far as larger players are concerned, they had moved to SEZs a few years back as soon as the SEZ facilities came into being. That should not have very much of an effect.

Q: The Finance Secretary and the Finance Minister made it very clear that the profit-linked incentives need to go and only investment-linked incentives will be considered. This ties in with the Direct Tax Code (DTC). There is no clarity yet on how much of the DTC white paper, which was opposed by industry, will be reviewed. From the Chairman of the Central Board of Direct Taxes (CBDT) we understand that a substantive part of it will be reviewed and industry should be a lot happier. What do you make of what you heard, on the back of the changes announced and your hope for the DTC?

Parikh: The hope for the DTC is that there is material rethink of what the DTC is going to carry with it because on a number of different issues, there was much pain that the DTC could have created if it was to be introduced in the form in which it had been put out for discussion. All those issues have been discussed on a number of different occasions and they are well known.

What was reassuring from different conversations that it did occur during the course of the day, including the conversation which the Finance Minster had, is he has sort of indicated that all feedback is being considered and that there is no intention in their minds of pushing through with the code and making some minor changes, but otherwise substantively keeping it in its current form.

Beyond that, hopefully, lots of this feedback does get processed. As to what elements do get processed and what don't is a matter of conjecture. I don't know if we can speculate on that.

Q: What is the impact of Minimum Alternate Tax (MAT) since it has been hiked? Are you happy that the Finance Minster has articulated the timeline on the GST and DTC?

Mahalingam: As far as MAT is concerned, it's a cash flow and a fairly big issue as far as TCS is concerned. It is going to be over Rs 100 crore. The reason I am calling it a cash flow issues is because we are hoping that the set of principles will apply. That is one of the feedbacks we have given as far as the DTC is concerned because that is not allowing for that at this moment in time.

As far as MAT is concerned, there is a concern, especially when we move from 10 to 15% and now to 18% in a very short period of time. As far as DTC is concerned, it is a good thing that he made it clear. There are quite a few things that we have raised. There are issues in terms of grandfathering clauses, SEZ and so on, which is very critical because it's not a simple problem.

Our company has investments or projects worth about Rs 5.000 crore in various stages and so on. That is a very important thing. The other one is MAT and so on. However, it is now clear that it's going to be on April 1, 2011, which was what was proposed earlier. It is something that we should sit down and plan. Hopefully, all our feedback will be taken into consideration.