In all my recent meetings, I have been asked about the expectations of the IT industry from the Union Budget 2011. The typical demand of this industry every year is to extend the tax holiday benefits for the Software Technology Park (STP) units. The DTC is expected to come into effect starting April 1, 2012, and is focused on eliminating most of those exemptions, including the STP benefits. But, when you look deep into it, I think, what the industry wants is more certainty and clarity in the tax regime coupled with simplification of the time-consuming appeal process.

The IT industry in India has come a long way. In the early 1990s, the industry was small. It required a lot of support from the government to grow. The STP scheme was a killer. It allowed small companies to flourish and expand, it enhanced their competitive advantage and gave them the resources to reinvest and grow. Over the years, the industry has become larger. This year the total software exports from India could be close to $60 billion. While the industry becomes larger and larger, the argument for continuation of the tax holidays becomes weaker and weaker.

However, the software industry is still very divergent. As per industry estimates, close to 80% of the companies are small and medium sized with a turnover of Rs 200-300 crore. As per the budget documents, the revenue forgone due to tax sops under Section 10A for STP units was Rs 14,651 crore in 2009-10. It could easily grow to Rs 20,000 crore in 2011-12, if the STP tax holiday is extended by one more year. These are large sums for a government that is scrambling around for resources to fulfil its social obligations.

As a country, the government requires enormous amount of resources to fulfil its social programmes and to build out massive infrastructure required for growth. For a developing country like India, the case for supporting a highly profitable and mature industry like software looks weak. However, there is a strong case for continuing with the tax support for small and medium sized companies with a group turnover of up to Rs 500 crore. Those companies still require support to be competitive in the global markets. The case for extension of the STP tax sops for larger companies is out of place and lacks economic justification.

I think more than the tax sops, what the industry wants is greater certainty and clarity in the application of laws. The classic case is the current service tax regime in the country for software exporters. While software exporters have been exempted from output service tax on their exports, they are required to pay the input cenvat on the services they procure. Subsequently, they can seek a refund from the government. In order to accelerate the cenvat refund process, the government had simplified such cenvat refunds based on a chartered accountants certificate. The administrative officers on the field reject such refund requests for frivolous reasons. This is despite the fact that some of the issues were decided in favour of the assessee at various appellate levels. As a result, there is a massive backlog, running into crore of rupees of cenvat refunds held up at various levels. It is an administrative nightmare. The government could have exempted the software exporters from any payment of cenvat taxes on inputs used towards software exports.

Similarly, Section 10A of the Income Tax Act related to exports done under STP scheme is riddled with too many interpretations at the field level. In the whole process, the assessing officers do not understand the business model, do not appreciate the economic intent of the legislation and raise unreasonable demands on software exporters. Corporates are then required to spend enormous amount of time and energy in the appeal process, which takes years to decide. Even matters that were decided at the appellate levels were disregarded by the assessing officers in their quest to collect more taxes.

Similar situation also prevails in the tax benefits under Section 10AA relating to the SEZ. Here again, the interpretation of the law is such that it defeats the whole intent of the law. The clarifications and instructions of the ministry of commerce, which is the nodal ministry for administering the law, is totally discarded and not considered at the field level. This is a classic example of two arms of the government working at cross purposes. There is a big disconnect between the intent of the law and the application of law and a lot of misinterpretation of law at the field level. The whole appeal process is time consuming and taxing for the corporates. There should be clear directions to the field on the intent and interpretation of the law and accountability should be fixed at the field level. This will increase the business confidence, accelerate the velocity of business and improve tax collection and efficiency.

While the continuation of tax support for smaller companies will provide them space to grow into bigger companies, the larger companies will be happy to pay taxes as there is greater certainty and clarity on the application of the law. Certainty always commands a much higher value in the corporate world.

The author is CFO of Infosys