The Indian IT companies have seen a reversal in fortunes with the turnaround in global IT spending. But their worries are far from over. Staff retention and rupee worries are just some of the issues that the companies have had to deal with in recent times. To compound this, the software technology park of India scheme (STPI) is all set to come to an end by March 31st this year.
The STPI scheme is a 100% export oriented scheme for undertaking software development for export. As a result, IT companies could claim tax benefits on the income generated from the regions covered under the scheme. This scheme has helped IT companies in the past. The effective tax rates for most companies have been in the region of 10-15% thanks to the scheme.
However, in the Union Budget of last year, the government decided to pull down the curtains on STPI. The popular scheme ends on March 31st this year. The impact of this was visible in the tax rates of most IT companies over the past few quarters. The effective tax rates had started to rise. Unfortunately this is expected to continue in times to come.
Source: Company data
While Infosys has already started to witness higher tax rates in the recent quarters, TCS and Wipro are yet to see the same. As a result, they would be impacted more once the scheme is lifted.
However, the impact on mid-cap companies would be worse. Most of them have witnessed lower net margins due to effect of the dwindling demand in light of the global crisis. Compounded with higher tax rates, impact on their margins would be much more severe as compared to the larger companies.