IT stocks soar on export tax clarification

After the Budget bloodbath, infotech stocks bounced back with renewed vigor on the bourses on Wednesday. As fears of a hit on earnings on account of the export tax receded, IT counters attracted hectic buying. Market darling and a favorite of FIIs, Infosys Technologies, leads the race with a Rs 500 plus lead. Others like Satyam, Wipro, SSI, NIIT, Mastek, and HCL Infosystems, too, followed suit. Most infotech stocks remained frozen at the upper circuit on the bourses. Apart from the top-rung stocks, others like Computech Int., RS Software, Cybermate, Leading Edge, Vision Technologies, Worldwide Tech, etc. all hit the upper circuit.

IT stocks soar on export tax clarification

Infosys, also led by news of a tie-up with SAP of Germany, zoomed to over Rs500. Satyam, where the FII limit can now be raised also closed at the day's best level. What brought back investors to these infotech counters is the peep into the fine print of the Budget. Although the Finance Minister introduced the new export levy as dreaded by marketmen, what he did not touch were the prevailing exemptions to infotech companies under Sections 10 And 10B of the Income Tax Act. 

Under these provisions, undertakings in free trade zone can avail of a 10-year tax holiday. What this means is that any infotech company currently enjoying a tax holiday on account of its software technology park (which is necessary for an EPZ) will be exempt from the new export levy. According to the explanatory memorandum, any software technology park set up before April 1, 2000, can continue to avail of tax benefits for the remaining unexpired period. STPs set up after this date can also avail of the tax benefits but within the guidelines on export tax.

This essentially leaves all big infotech out of the scope of the new export tax. No wonder then that the likes of Infosys, Satyam, Pentamedia, HCL, SSI, Mastek, etc are back on the buy list of investors. With all of them reaping the benefits of Section 10 A and B, the outlook is bullish. The markets are, in fact, betting on Infosys, Satyam, and SSI as the picks of the month. Wipro'sstock, which came under the bear influence after touching a new high at Rs980 level, too attracted considerable buyers. Wipro and Mastek, which would have been the worst hit by the export tax, are now making hay thanks to the section 10 A and B exemption.

While most big and mid-sized infotech companies would escape from the export tax levy, it's the smaller firms who would bear the brunt. Analysts tracking the sector say it takes a while for an infotech start-up to set up an STP as it entails some cost and export obligations. Apart from the license fees to the Department of Electronics, firms also have to commit an export income as part of the agreement.

Only when operations reach a certain critical mass do companies think about an STP, says an official in a Delhi-based IT company. So, start-ups and name changes could be the target. However, as these earn very little forex receipts at present, the impact could be minimal. No wonder small IT companies also moved with the general trend in the market.