Sandeep Joshi

Firms will have to pay 11.22 per cent of adjusted book profits

NEW DELHI: Taking the fast-growing Information Technology sector by surprise, Union Finance Minister P. Chidambaram on Wednesday brought IT companies and firms under the Minimum Alternate Tax (MAT) regime.

Paying no heed to the IT sector's demand for extending a 10-year tax holiday for export revenues, currently valid till 2009, Mr. Chidambaram proposed to levy MAT on all IT firms, which will have to pay 11.22 per cent of adjusted book profits. MAT, introduced for companies with book profits in 1996-1997, will now apply to all corporate incomes.

The budget also brought `employee stock option plans' (ESOP) under the fringe benefit tax (FBT) besides hiking dividend distribution tax (DDT), steps that have not been welcomed by the industry. A large number of IT companies provide fringe benefits to their employees through ESOPs. While imposition of MAT is likely to affect net margins of IT companies, DDT will impact profitable firms.

For the telecom sector, the Finance Minster did not announce much, apart from making a promise to simplify the tax structure as demanded by all leading telecom companies for many years. "The Department of Telecom will constitute a committee to study the present structure of levies on the telecom industry to simplify the tax structure," he said in his budget speech.

Total levies, including license fee, service tax and spectrum charge, on the sector is about 26 per cent of the revenue, the highest compared to other Asian economies.

A long-standing demand of the telecom sector has been the rationalisation of levies and a uniform revenue share licence fee at a nominal level for all telecom circles to 6 per cent from the current 6-10 per cent.

Reduced levies will mean passing on the benefit of lower tax to customers, who pay about 30 per cent of their bills directly or indirectly as taxes and levies.

The industry wanted a single levy and simplifying the present structure of multiple levies.