We have set up Software Technology Parks (STPs), which are 100% export-oriented units, for the development of software at Bangalore, Bhubaneswar, Chandigarh, Chennai, Hyderabad, Mangalore, Mysore, Pune and Thiruvananthapuram (all in India). Certain capital items purchased for these centers are eligible for 100% customs and excise duty exemption, subject to fulfillment of stipulated export obligations, which was five times the value of duty-free imports of capital goods, or duty-free purchase of goods subject to excise, over a period of five years on a yearly basis. Beginning April 2001, the export obligation on duty-free import of capital goods, or duty-free purchase of goods subject to excise is thrice the value of such goods over a period of five years. Beginning April 2002, the export obligation on duty-free import of capital goods, or duty-free purchase of goods subject to excise is thrice the value of such goods over a period of three years. Beginning April 2003, the export obligation is restricted to net foreign exchange earnings for that particular financial year on duty-free import of capital goods, or duty-free purchase of goods subject to excise. All STP units started after March 2003 are subject to the new guidelines on calculation of export obligation as stated above. The export obligation on the wage bill was removed a few years ago.
The non-fulfillment of export obligations may result in penalties as stipulated by the government, which may have an impact on future profitability. The table showing the export obligation, and the export obligation fulfilled by us, on a global basis, for all its STP units together, is as follows :
The total customs and excise duty exempted on both computer software and hardware imported and indigenously procured by us since 1993, amounts to Rs. 720 crore.
We have fulfilled our export obligations on a global basis for all our operations under the Software Technology Park scheme. However, in case of STPs operationalized during the year, the export obligation will be met in the future. The export obligation in fiscal 2004 was higher on account of setting off cumulative export obligations for and including 2004 in the same year.
Our first Special Economic Zone (SEZ) unit, became operational at Mahindra World City (a private multi-product Special Economic Zone), Chennai, in the financial year 2005-06, with an approved area of about 75.06 acres. We established our second SEZ unit at Chandigarh (Rajiv Gandhi Chandigarh Technology Park), with an approved area of about 30.22 acres, in the financial year 2006-07. During the financial year 2007-08, we established SEZs at Pune and Mangalore with an approved area of about 77.82 acres and 309 acres respectively. During the financial year 2009-10 one more SEZ at Thiruvananthapuram, with an approved area of about 50 acres, commenced production. The SEZ Unit came into existence under the new Special Economic Zones Act, 2005 (“the SEZ Act”).
As per the SEZ Act, the unit will be eligible for a deduction of 100% of profits or gains derived from the export of services for the first five years from commencement of provision of services and 50% of such profits or gains for further five years. Certain tax benefits are also available for further five years, subject to the unit meeting defined conditions. Other fiscal benefits including indirect tax waivers are being extended for setting up, operating and maintaining the unit.
We benefit from certain significant tax incentives provided to the software industry under Indian tax laws. These currently include: (i) deduction of export profit from the operation of software development facilities designated as Software Technology Parks (the STP tax deduction) and (ii) deduction of export profits from units in Special Economic Zones.
The period for which STP tax deduction is available to each STP was restricted to ten consecutive years, starting from the financial year when the unit started producing computer software or March 31, 2009, whichever is earlier.
The Finance Act 2008 and 2009, extended the availability of the ten-year tax holiday by two more years (one year by Finance Act 2008 and one more year by Finance Act 2009), such that the tax holiday will be available until the earlier of fiscal year 2011 or 10 years after the commencement of production by the undertaking. The details of the operationalization of various software development centers and the year to which the exemption under the Software Technology Park scheme and for Special Economic Zones is valid, are presented in the Management's discussion and analysis section of the Annual Report.
The benefits of these tax incentive programs have historically resulted in an effective tax rate, well below the statutory rates for us. There is no assurance that the Government of India will continue to provide these incentives.
The government may reduce or eliminate the tax exemptions provided to Indian exporters at any time in the future. This may result in our export profits being fully taxed, and may adversely affect the post-tax profits in the future.
On a full tax-paid basis, without any duty concessions on equipment, hardware and software, our post-tax profits for the relevant years are estimated as follows:
|Profit before tax and exceptional items||7,899||6,907||5,344|
|Less : Additional depreciation on duty waived for certain assets||70||90||84|
|Reduction in other income||49||68||58|
|Adjusted profit before tax||7,780||6,749||5,202|
|Less : Income tax on the above on full tax basis||2,760||2,142||1,838|
|Restated profit after tax||5,020||4,607||3,364|
|Restated basic EPS (Rs.)||87.99||80.47||58.87|
|Note :||The figures above are based on consolidated Indian GAAP financial statements. However, it may be noted that this is only an academic exercise. We have provided for income tax in full in the respective years and there is no carried-forward liability on this account.|