TCS, Wipro and Infosys have a problem—to take the corporate tax cut or not

• If IT majors opt for this lower corporate tax of 22%, then they will have to let go of tax exemptions they have been enjoying so far.
  
• Currently, most IT companies enjoy tax exemptions under Section 10AA of the Income Tax Act for revenues from special economic zones (SEZs).
  
• Kotak equities believes that Infosys may possibly choose to adopt the new corporate tax rate and let go of all exemptions.
  
• TCS’ effective tax rate will remain unchanged in the current financial year. Same holds true for Mindtree, says Kotak.
  

India Inc is busy celebrating the Finance Minister’s corporate tax rate cut. For IT companies, this rate cut comes with a rider.


If TCS, Wipro, Mindtree, Infosys and others opt for this lower corporate tax of 22%, they will have to let go of tax exemptions they have been enjoying so far.


Currently, most IT companies enjoy tax exemptions under Section 10AA of the Income Tax Act for revenues from special economic zones (SEZs).


“Companies will have to decide whether taxes paid in India are less than or more than the revised effective tax rate, if it is the latter they may forgo the current SEZ exemptions and transition to new (lower) corporate tax rate in India,” says a report by Kotak Institutional Equities.


To take or not to take


There are a few two to three factors that might help Indian IT companies decide.


One is the tax that is payable on other income — most IT companies are flush with capital which is deployed in mutual funds, fixed deposits and other debt instruments.


In addition, most technology companies have overseas earnings and the accounting structures might help them decide which way to go.


“We believe that Infosys’ India tax rate will be over 26%. The company may possibly choose to adopt the new corporate tax rate and let go of all exemptions. Wipro’s India tax rate is close to 21-22%. Yet the company’s effective tax rate (ETR) will reduce by 1-2%,” says Kotak.


“TCS’ effective tax rate will remain unchanged in the current financial year. Same holds true for Mindtree. Impact for other companies will vary but will not be meaningful,” the report added.


Due to marginal benefit, tech majors have always been seeking a reduction in minimum alternate tax (MAT) instead. SEZs attract a MAT of 21.5%, and any reduction in this would have a greater impact on the technology majors in India.