India extends techs tax break but shares fall

By Sumeet Chatterjee and Bharghavi Nagaraju

BANGALORE, July 6 (Reuters) - India on Monday extended a tax holiday scheme for outsourcing companies by a year to March 2011, giving a breather to the export-focused sector struggling under a global slowdown.

Shares in top outsourcing firms shed up to 3.8 percent as the extension, unveiled in the annual budget, fell short of market expectations but their losses were lower than the main index that dropped 5.8 percent.

"A longer-term view should have given a better impetus to the industry, which is suffering due to low opportunities in traditional U.S. and European markets," said Girish Trivedi, deputy director of ICT practice at Frost & Sullivan.

Presenting the budget for 2009/10, Finance Minister Pranab Mukherjee said "sunset clauses" for deduction of export profits was being extended by one more year to the fiscal year ending in March 2011.

Facilities located in software technology parks (STPs) were given a 10-year tax holiday about a decade ago to boost growth in the showcase sector that employs more than 2 million people and accounts for more than 5 percent of the gross domestic product.

The scheme was due to end in March 2010. "The tax break extension is an extremely welcome thing but I wish it was done for a longer term," said S. Mahalingam, chief financial officer of Tata Consultancy Services (TCS.BO).

Shares in Tata Consultancy, India's top IT services firm, fell 2.5 percent to 381.60 rupees, No. 2 Infosys Technologies (INFY.BO) dropped 2.3 percent to 1,760 rupees and Wipro (WIPR.BO) ended 3.8 percent lower at 371.10 rupees.

Brokerage Religare Hichens, Harrison had said in a pre-budget preview it expected the budget to extend the tax-break by another three years, which would boost earnings by 5 to 8 percent for software firms. "It may lead to tax savings," said Surjeet Singh, chief financial officer of Patni Computer Systems (PTNI.BO). He said the tax rate for the firm would have risen to 30 percent from 18-19 percent if it was not extended.

Under the tax holiday scheme, companies in the software technology parks pay taxes only on the business they get from India. Most of them get more than three-quarter of their revenue from exports.

Srivathsan Ramachandran, a technology analyst at Spark Capital Advisors, said the extension would benefit only those software services companies who have not yet completed 10 years of operations in the tax-free software technology parks. Infosys expects its tax rate in the fiscal year beginning in April 2010 to rise to 23-25 percent from 18-20 percent in this year as most of its units in STPs will complete 10-year holiday period this year, said chief financial officer V. Balakrishnan. "It will not help all the companies," he said. (Editing by Ranjit Gangadharan)