IT cos outside SEZs feel the heat

ANURADHA HIMATSINGKA & WRITANKAR MUKHERJEE

TIMES NEWS NETWORK[ TUESDAY, MARCH 13, 2007 02:26:50 AM]

KOLKATA: IT Companies operating from non-special economic zones are an
unhappy lot these days. The introduction of minimum alternate tax (MAT),
levy of service tax on rentals as well as discontinuance of income-tax
benefits under the STPI policy beyond March 2009 is expected to make
life difficult for these IT companies, compared to their counterparts
with offices in special economic zones (SEZs).

Levies, as announced by finance minister P Chidambaram, are likely to
dent profits of IT companies within non-SEZ premises. Rough industry
estimates suggest operating profits of units located in non-SEZs may be
down 12-15% annually, while net margins could take a 3-4% hit annually
in FY08. Mid-sized IT firm Acclaris MD Kalyan Kar said: "Because of the
impact on margins, IT firms will have little option but to opt for SEZ
facilities."

But there's a catch here as well. According to SEZ regulations, an IT
company with facilities in a non-SEZ can move into an SEZ facility only
by starting afresh and setting up completely new infrastructure, instead
of merely transferring physical assets from its existing set-up. "This
would translate into an additional capital burden," Mr Kar added.

While large IT companies may be able to take the impact on profitability
or an additional capital burden, small to medium enterprises will be the
worst hit. This apart, rising rental rates of IT SEZ facilities,
compared to non-SEZ ones, will also make life for SMEs difficult,
according to Nasscom president Kiran Karnik.

"While monthly rentals of IT SEZ space in Noida are about Rs 100 per sq
ft, that of non-SEZ IT space is around Rs 30-35 per sq ft. Developers of
IT SEZs may jack up rentals further because of increased demand for
space in SEZs by savvy techies. This might stifle growth of the IT
sector in the long run. We plan to take up these issues with the finance
ministry," Mr Karnik told ET.

While several IT/ITeS biggies with whom ET got in touch refused to
comment on the issue, Cognizant Technology Solutions VP Siddharth
Mukherjee said: "There is no doubt that it would make sense to operate
out of SEZs for long-term benefits. There is also no room to pass on the
burden to clients since we enter into long-term rate agreements."

"At a time when the market is highly competitive, it might be next to
impossible to raise rates even for new contracts. All this pressure is
coming at a time when even the dollar is depreciating," said Salt
Lake-Rajarhat committee of Bengal Chamber of Commerce & Industry
co-chairman D K Chaudhuri.

http://economictimes.indiatimes.com/News/Economy/Infrastructure/IT_cos_outside_SEZs_feel_the_heat/articleshow/1755532.cms