For the $50 billion Indian IT the formal extension of the 10-year tax holiday for the sector by one more year is a major relief. This is the second consecutive one year extension for the Software Technology Park of India (STPI) scheme under Section 10A of the Income Tax Act. “Though the tax-holiday has been extended for only a year, it is understandable with the phenomenal pressure that the government is facing due to the widening fiscal deficit,” said S Mahalingam, CFO of India’s largest software firm Tata Consultancy Services.

The IT industry which has been severely impacted by the global economic crisis and has seen its growth rate half over the past one year (from over 30% to 16-17%) has been demanding the extension of the STPI by at least 3 years. In fact, communications and IT minister A Raja had earlier stated that the ministry will push for a three year extension of the scheme. According to market analysts, tax savings from the extension are not enough to make up for the loss in business due to reduced IT spend globally, but the move nevertheless is beneficial for IT companies. As a result at the Bombay Stock Exchange, the IT index went down by only 2.74%, compared with the overall drop of 5.83% in the Sensex.

However, the increase in the minimum alternate tax (MAT) to 15% of the book profits from the earlier 10% will increase the tax liability of IT companies. MAT is a tax imposed on companies that are fully exempt frm paying corporate tax. Large number of IT companies qualify for the exemption. Suresh Senapaty, executive director and CFO of Wipro said the increase in MAT has been balanced by expanding the time-frame for setting-off from seven years to 10 years, “which appears fair”. Back of the envelope calcuation by analysts say software exporters’ tax liability will drop to 15% from 34%, if you put STPI extension and MAT together.

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