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Economy

Budget Impact: Tech

Tech companies will be affected by the Budget, but how?

Neutral: MAT applies

Minimum alternate tax of 11.33% will now be applicable to all tech companies. That is a minimum tax, which is not actual tax but can be set off against tax paid in later years (can carry it forward upto seven years). In 2009 the exemption given to STPI companies will go away and all tech companies will be absorbed into the tax bracket. MAT is a precursor to that.

While this may not impact companies much – expected margin hit is about 4% in reality – it will be a precursor of things to come. Eventually these companies have to live with paying a lot more tax. One view is that they have the pricing potential to increase rates, but we’ll have to wait and see. Infy has said 1.5% of their margins will be hit, and that might impact the stock prices as well (and already has)

Negative: service tax on rent
Commercial rents are now going to be higher, with 12.36% service tax extra. The hit on companies will be less than 1% of margins, most likely, for the big tech companies. The smaller tech and BPO companies perhaps pay a greater percentage of their costs as rent or lease payments, and this will have a greater impact for them.

Negative: DDT is up
DDT is now 20% for mutual funds and 25% for liquid funds (for corporates). A number of tech companies used to place extra cash with liquid funds but with the new taxation some of the other income will reduce.