India’s outsourcers lose tax breaks

The Indian government has clamped down on outsourcing companies, taxing revenue that was previously exempt.

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The Indian government has clamped down on outsourcing companies, taxing revenue that was previously exempt.

In his budget speech before India's Parliament yesterday, Indian Finance Minister P. Chidambaram announced the decision to extend a minimum alternate tax (MAT) to income that is currently covered under tax exemptions. This means that the export revenue of a large number of Indian outsourcing companies will be brought under the federal tax net.

The tax could be the first of measures by the government to reduce tax benefits for the country's outsourcing industry.

Prices that outsourcers charge their customers are unlikely to go up as a result but profit margins will be affected, said N. Ramachandran, chief financial officer of outsourcer iGATE Global Solutions.

There are other tax issues looming for the Indian outsourcing industry, consisting of software services, business process outsourcing (BPO) and call centre companies. A large number of the operations of these companies were set up under an export-promotion scheme called the Software Technology Parks of India (STPI), which entitled them to tax breaks under the Indian Income Tax Act.

However, the STPI scheme ends next year. Although the industry and the National Association of Software and Service Companies (NASSCOM) have asked for an extension of the scheme for another 10 years, the finance minister made no reference to this request in his budget speech.

“The imposition of MAT is disappointing, as is also the absence of any announcement on the continuation of tax benefits beyond next year,” said Ananda Mukerji, managing director and CEO of Firstsource Solutions, a BPO company in Mumbai. If the STPI scheme is not renewed, outsourcing companies will have to locate themselves in special economic zones (SEZs) for tax benefits. Under the STPI scheme they could locate their facilities where it was most viable for them in terns of cost and availability of staff, Ramachandran said.

N. R. Narayana Murthy, chairman of Infosys Technologies, however, said that the outsourcing industry was now large enough to pay taxes at levels similar to other industries in India.

The finance minister has also brought employee stock options plans under a fringe benefit tax. This move will make current palnsexpensive and will make it difficult for the IT industry that uses them as a major tool to attract talent, said Deepak Ghaisas, CEO of the India operations and chief financial officer of i-flex solutions, a financial software company, owned by Oracle.

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