Budget 2011-12: MAT on SEZ to hit IT SMEs


Finance minister Pranab Mukherjee in his Budget speech has said that though he proposes to cut down the current surcharge of 7.5% on domestic companies to 5%, he proposes to increase rate of minimum alternate tax (MAT) to 18.5%, from the pre-existing 18%. For sharing of the corporate tax liability, he has proposed to impose MAT on developers of special economic zones (SEZs) along with units operating at SEZs.

Though large companies like Infosys and Tata Consultancy Services will not be impacted much by these changes as they already have an effective tax rate of 20%, SMEs will have a tough time battling it out.

Positive highlights for SMEs

According to Dinesh Agarwal, founder and CEO of IndiaMart.com, “The decrease in the surcharge tax limit on corporate tax to 5% will help small and medium businesses who would now have more capital to pursue expansion.”

In this context, YV Verma, COO of LG Electronics India, said, “The reduction of the corporate tax surcharge from 7.5% to 5% is a welcome step for sure and we thank the FM for retaining the central excise duty at 10%; this will help the industry that is already cowering under the oppression of the inflation.” Focusing on the services sector which is expected to post a growth of 9.3% and is regarded as one of the main contributors for economic growth of the nation, Mr Verma stated that the government needs to ensure to address ecological concerns with development aspirations, more so as the economy is set to grow at 9%.

sezIT sector hurt by FM’s budget

However, the budget has left the IT sector largely unimpressed and grumpy. “We expected the FM to understand that India is a nation of movie-goers, and that this industry is bringing the government huge revenue because of its remarkably fast paced growth. However, the visual effects industry requires more acknowledgements. This industry too needs to enjoy the benefits that other industries do in terms of grants from the government to boost infrastructure and technology for its growth. We have absorbed 1500 professionals so far and are planning to hire 3000 more for our new facility in Chandigarh. We were expecting some more support from the government by allowing us to bring in new technology at cost-effective rates, giving us tax breaks and relaxing import duties on imported equipment. Though the Budget as a whole is balanced, but some cuts in custom duty and income tax would have been a cause to celebrate. We hope some positive changes would happen before the Budget is passed,” says Nishant Fadia, CFO of Prime Focus Ltd, a Mumbai based visual and 3D services provider.

Apex software industry body NASSCOM expressed grave disappointment in the Budget and said to the media that the IT/ITeS sector has been dealt with quite a few setbacks – the implementation of MAT on SEZs and the withdrawal of tax exemption under Section 10A and 10B. According to the SEZ scheme, units at SEZs would continue to secure profit base tax exemptions; imposing 18.5% MAT would deter SMEs as well as tier II and III cities who are aiming to expand in the SEZ scheme.