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A key demand for the budget from the Indian IT sector would be the extension of STPI
benefits under section 10A/10B of the Indian Income tax law beyond 31 March 2011. Based
on our interaction with Indian IT companies we get a mixed feedback regarding the
likelihood of an extension. Consensus EPS estimates are not considering any extension
beyond 31 March 2011. Even DTC (direct tax code) proposals are only talking about
grandfathering of SEZ benefits. Hence we place a low probability on the extension.
However if these STPI tax benefits are extended beyond 31 March 2011, then we believe
that midcap companies will benefit more than the large caps. Amongst large caps we
believe that TCS and HCL Tech would benefit higher than Infosys and Wipro.
Industry demand #1: Extension of STPI benefits under section 10A/10B of the Indian Income tax
law beyond 31 March 2011 by one to five years
Current status: Income tax exemption available to most of the export oriented IT companies'
STPI units under section 10A/10B of the Indian Income tax law will expire either on 31 March
2011 or on completion of 10 years of operations of STPI units, whichever is earlier.
Impact if implemented: Positive. Amongst large caps we believe that TCS and HCL Tech would
benefit higher than Infosys and Wipro. EPS of Infosys and Wipro beyond FY11 will likely be
affected insignificantly as most of their STPI facilities would complete 10 years’ holiday by FY11.
Midcap companies will benefit more than the large caps companies. We believe that, with lower
balance sheet and revenue size, expansion of mid-cap companies within SEZ would be limited
beyond FY11.
Based on our understanding, proposals in the DTC (Direct Tax code) Bill 2010 (presented in
August 2010) includes: 1) SEZ units that commence operations on or before 31 March 2014 are
entitled to a grandfathering of profit-linked tax deductions; and 2) MAT (Minimum Alternate Tax)
applicable to SEZ units at 20% of book profits and MAT credit allowed to be carried forward for 15
years. Assuming DTC's implementation by 1 April 2012 and current proposals are only talking
about grandfathering of SEZ benefits as discussed above, we believe that in the best case STPI
benefits would be extended until 31 March 2012 (though we do not place a high probability on the
same).
Industry demand #2: Reduction in MAT (minimum alternate tax) rate to 10%
Current status: Majority of the export-oriented IT companies were covered under MAT @ 18%.
Impact if implemented: Positive on cash flow but largely neutral on EPS (before considering
some positive impact on other income) as companies paying MAT are allowed to carry forward
the same in following years subject to maximum of 10 years of carry forward. As mentioned
earlier, the Direct Tax code proposes an MAT rate of 20%, hence a stop gap reduction from 18%
to 10% looks unlikely, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A key demand for the budget from the Indian IT sector would be the extension of STPI
benefits under section 10A/10B of the Indian Income tax law beyond 31 March 2011. Based
on our interaction with Indian IT companies we get a mixed feedback regarding the
likelihood of an extension. Consensus EPS estimates are not considering any extension
beyond 31 March 2011. Even DTC (direct tax code) proposals are only talking about
grandfathering of SEZ benefits. Hence we place a low probability on the extension.
However if these STPI tax benefits are extended beyond 31 March 2011, then we believe
that midcap companies will benefit more than the large caps. Amongst large caps we
believe that TCS and HCL Tech would benefit higher than Infosys and Wipro.
Industry demand #1: Extension of STPI benefits under section 10A/10B of the Indian Income tax
law beyond 31 March 2011 by one to five years
Current status: Income tax exemption available to most of the export oriented IT companies'
STPI units under section 10A/10B of the Indian Income tax law will expire either on 31 March
2011 or on completion of 10 years of operations of STPI units, whichever is earlier.
Impact if implemented: Positive. Amongst large caps we believe that TCS and HCL Tech would
benefit higher than Infosys and Wipro. EPS of Infosys and Wipro beyond FY11 will likely be
affected insignificantly as most of their STPI facilities would complete 10 years’ holiday by FY11.
Midcap companies will benefit more than the large caps companies. We believe that, with lower
balance sheet and revenue size, expansion of mid-cap companies within SEZ would be limited
beyond FY11.
Based on our understanding, proposals in the DTC (Direct Tax code) Bill 2010 (presented in
August 2010) includes: 1) SEZ units that commence operations on or before 31 March 2014 are
entitled to a grandfathering of profit-linked tax deductions; and 2) MAT (Minimum Alternate Tax)
applicable to SEZ units at 20% of book profits and MAT credit allowed to be carried forward for 15
years. Assuming DTC's implementation by 1 April 2012 and current proposals are only talking
about grandfathering of SEZ benefits as discussed above, we believe that in the best case STPI
benefits would be extended until 31 March 2012 (though we do not place a high probability on the
same).
Industry demand #2: Reduction in MAT (minimum alternate tax) rate to 10%
Current status: Majority of the export-oriented IT companies were covered under MAT @ 18%.
Impact if implemented: Positive on cash flow but largely neutral on EPS (before considering
some positive impact on other income) as companies paying MAT are allowed to carry forward
the same in following years subject to maximum of 10 years of carry forward. As mentioned
earlier, the Direct Tax code proposes an MAT rate of 20%, hence a stop gap reduction from 18%
to 10% looks unlikely, in our view.
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