If Finance Minister P Chidambaram allows a major tax exemption to Indian infotech companies to lapse by March 31, 2009, as envisaged, the taxman could register a significant rise in revenue.

Once Sections 10A/10B of the Income Tax Act lapse, the tax liability of infotech firms will also increase to the level of other companies.

The finance ministry estimated the revenue foregone due to tax breaks under the section at Rs 10,740 crore (Rs 107.4 billion) in 2004-05 (based on the then tax rate of 36.59 per cent). If the present tax rate of 33.66 per cent is applied, it will have a significant impact on the bottom line of Indian infotech firms.

Based on an average 10.45 per cent tax (over Rs 1,395 crore) paid by 121 listed infotech companies in the first nine months of the current financial year, and assuming similar revenue growth, the tax liability of these companies may go up to around Rs 3,720 crore, if not more.

This is because while the total incidence of corporate tax is 33.66 per cent, the effective tax rate is around 20 per cent due to various tax sops the companies enjoy. This does not include fringe benefit tax.

However, the number of infotech companies in the country is much higher. According to Nasscom data, there are 3,000-odd infotech and infotech enabled services companies in the country.

The debate on Section 10A/10B started after both Prime Minister Manmohan Singh and the finance minister hinted that the focus of the coming Budget would be on removing tax exemptions.

PricewaterhouseCoopers deputy tax leader Shyamal Mukherjee believes revenue collections will rise significantly if the section is allowed to lapse.

He said the move would impact smaller firms more as large infotech companies might move to special economic zones.

But others disagree. "Bigger companies cannot shift their business to SEZs. They will have to set up a new unit. For smaller companies, the relocation costs will be substantial and could come with disadvantages related to location," Vivek Mehra, executive director, PricewaterhouseCoopers, said.

He added that the bigger companies would expand their business and renew their contracts to avail of the tax benefits after shifting to SEZs while smaller companies might suffer.

Nasscom has urged the finance ministry to extend the benefits of Section 10A/10B by 10 years from April 1, 2010 onwards.

Inputs from B G Shirsat