FM shatters IT cos' hopes; ignores STPI extension, ups MAT

Finance Minister Pranab Mukherjee has definitely upset technology companies by ignoring the extention of tax benefits under the Software Technology Parks of India (STPI) scheme in the Union Budget 2011-12. The FM has also raised the minimum alternate tax (MAT) to 18.5% from 18% as per the Direct Tax Code (DTC), thus, saddening tier-I IT companies that have set up their SEZs who will now be affected with an increase in the tax rates from FY12.

The IT firms eyed for an extension of tax benefits under the Software Technology Parks of India (STPI) scheme. The STPI tax benefits available to the IT companies is about to lapse in March 2011. The lack of extension of the sops is bound to hurt tier-II companies that are currently receiving benefits.

The denial of further sops is bound to affect mid-sized and smaller IT stocks like Hexaware, Zensar, Allied Digital, Mphasis, 3i-Infotech, CMC and others. The increase in the taxes are set to influence big IT names like Infosys, Wipro, HCL Tech and others.

India's USD 60 billion technology services industry is a major contributor to the country's GDP. The growth monster, post the slowdown, is back on secular growth trend led by strong growth in the export market.

However, while earnings of the companies have been positive so far, revenue growth is a concern for IT companies. Volume growth has been slower than expected. The managements of IT companies are confident that future outlook would be better with increasing IT budgets.

Also discretionary spending is witnessing a revival. While the big-players are not facing problems currently, the small and mid-sized ones are struggling to grow post the recession, and so a slew of measures such as the STPI extension and tax clarifications would have provided an improvement in their bottom-lines that would fuel future growth.