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Software cos pay lower taxes while income rises
August, 14th 2006
Most revenues come from new, tax-exempt offshore units Software services companies seem to be paying lower taxes even though their revenues have been growing. A look at the profit and loss accounts for some of the top IT exporters listed by the Natioanl Associationof Software and Services Companies (Nasscom) this July, shows that provision for taxation as a percentage of Profit Before Tax (PBT) has declined in five of the ten companies considered. Barring Polaris Software Labs and Patni Computers, no other company has seen an increase in this ratio. Infosys Technologies and Cognizant Technology Solutions have seen a reduction in provision for taxation even in absolute terms. Infosys provided Rs 303 crore for taxes in 2005-06 as opposed to Rs 325 crore the previous year. Cognizant provided Rs 85.5 crore and Rs 117.74 crore during 2005-06 and 2004-05 respectively. It is understood that provision for taxation is made on three accounts tax on profits generated from onsite operations, tax on interest income and tax on profits generated from offshore locations (that have come out of tax-free STPI schemes). The table indicates that tax paid by IT companies is falling while revenues are growing. Does it mean more revenues come from the tax-free STPI units? Mr Rajesh Ramaiah, Corporate Treasurer, Wipro Ltd, says, "The additional exports done every year by Wipro are out of a tax-free Software Technology Parks of India (STPI) Unit." The ratio for Wipro has been marginally reduced over 2005-06 and 2004-05. IT companies enjoy a ten-year tax holiday from the time of inception and by 2009, irrespective of the ten-year period, all profits from IT companies will be taxed. IT majors like Wipro, Satyam Computers and Infosys have few facilities that have existed for ten years or more. Most new facilities have come up over the last five years. Companies failed to share the revenue split from taxed and un-taxed units. It is understood that most revenues come from the new un-taxed units. Some of Satyam's facilities started being taxed this year. Mr Srinivas Vadlamani, Chief Financial Officer, Satyam, says, "The increase in tax in 2005-06 is because we have not included provision for deferred tax and FBT. These form around 1.4 per cent of the PBT. So effectively there has been no increase in the last two years."
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