New Delhi Times

Gaurav Bhatnagar reporting from New Delhi, India

Thank you IT bigwigs for screwing the little guy

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This year’s budget is going to have a significant impact on the functioning of software service startups in India. The government is introducing a 12% minimum alternate tax (MAT) that needs to be paid by IT companies even if their actual tax liability is nil (as is the case of 100% export oriented units). MAT is adjustable against future tax liabilities so as such it doesn’t affect the profit and loss statement of a company. But it does affect cash flow.

What really irks me is that IT bigwigs like Narayana Murthy have been advocating introduction of such taxes since the IT industry has enjoyed tax free status for “too long”. Well, truth be told, it is the Infosys’ and Wipros of India who have enjoyed this status for a long time. Secondly, since most big IT companies anyway are not 100% export oriented, actual increase in their tax payout is in the tune of only 1-2%. So for all practical purposes, these companies are unaffected.

Now consider a small software startup like ours. Because of the tax exempt status of export oriented work, it makes sense for us to focus our energies on acquiring overseas clients. So being almost 100% export oriented, our tax liability suddenly goes from 0 to 12%. That is a direct hit on our cash flow. What is worse is that our pricing and billing is based on the assumption that the income will be tax free. That means, now to maintain same cash flow, a lot of startups might actually have to hike their billing rates  a little. That makes them less competitive.

It is very disappointing that people like Narayana Murthy are now taking the seemingly high ground and advocating taxes when they have themselves flourished largely because of these very tax sops.

Written by gaurav

March 4th, 2007 at 11:24 pm

Posted in India,My Company

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  • http://www.twentyonwards.blogs.com Jatin Varma

    the other crap shoot tax is the 12% service tax on commercial leasing, that means i’ll be paying a tax on my office rental…it probably can be adjusted against my earnings..but those wont cme in for a while..so i am stuck paying more on an already inflated rent thanks to the sealing goin on in delhi!

  • Pravesh

    Gaurav.
    While I do have sympathies for you on the increased tax front. But I see no reason, why IT shouldnt be taxed. Initially it was not taxed coz of the fact that it was not developed and it would have been more profitable for the country to give them tax rebates. But that phase is crossed. Since, all the other companies pay taxes, it is absolutely imperative for you to pay taxes. Why should airlines pay tax and not tekriti. Why should a business owner in Gurgaon pay tax out of his income and not Tekriti. Ofcourse everybody should pay equal and fair taxes. Sorry for being harsh, but I think what was unfair is now becoming fair. Ofcourse Narayan murthy could be opportunist.
    Do let me know your comments.
    Pravesh

  • http://www.arckid.com Ashvin Savani – Arckid

    @ Pravesh,
    Pravesh, You are right – All should be similar in terms of taxation. But It should not be right while you are declaring first that you wont need to pay high till 2010 and all of sudden someone says to you that now you need to pay 12% of more tax. Its still ok for small companies who are doing projects on monthly or say 3 month timelines. What if you fixed a project for a full year or say 3 years before this budget and where you not calculated such tax and quote your client competitive price.
    I am not sure, that you are from which industry or even if you are in same industry – I am not sure about the company size. Taxation increment is not bad, as obviously country will be strong, but still at that time, govt. should think that if they already declared something upto some time, you should not get it back in one shot! It may make some companies feeling like your VC comes someday morning and will tell you, I am not interested any more!
    Same like you, sorry for being harsh, but thats the truth :)
    @ Gaurav,
    I am not sure, if anything can be done or not (or govt. will consider it or not), but it would be good if companies like us together make some request together to FM for the same. :)

  • Dhurendar Bhatawdekar

    Hypocrisy man.. it’s in the desi blood. Even Narayan Murthy cannot escape it though he might be a successfull person. It’s all this crap that ire’s me most.

  • sa

    old wine, new bottle

  • http://poonaji.blogspot.com anoop

    yes, i felt the same when i read the discussion ( Muthy and Premji) in economic times…
    he should retire and keep quiet.

  • PK

    Isnt’ this typical of Mr. Murthy!! Having enjoyed the perquisites & previliges of cheap public higher education in the IITs… and now that his kids & grandkids and probably many generations more can afford to pay their way through any place of their choosing, he is out there advocating the merits of private higher education.
    I wonder why he didn’t try to pay his way through MIT and then come back to us with this gospel.

  • T. Varadaraj

    Guys,
    Don’t bother doing business in India. The only reason India flourished for the last 15 years is that near bankrupcy in 1990 forced politicians to temporarily remove their grubby hands out of your pocket. Now they are back at doing what they do best: pick it.
    Where in the world have you heard of a service tax on rental property? I had a lot of respect for Chidambaram but it’s obvious that he’s being badly influenced by the communist company that he keeps.

  • vivek

    what is the effect of service tax on rental income, for properties covered by rent control acts in india, where, in the absence of contrary to contrart, the property rent cannot be increased, and even fair rents have to be decided by the court, with a prolonged battle of years. i believe the defination of person in the act, so far it concerns lease of proeprt has to be modified to read that person meaning corporate entities and not individuals.

  • Mohan Burman

    List of highest tax paying company in india now.

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