Keep tax breaks on for IT, ITeS

Written by Vrishti Beniwal | Updated: Jan 29 2008, 03:56am hrs
The IT and ITeS sectors in India witnessed phenomenal growth in the last few years. But that may change if the sops-laden Software Technology Parks of India (STPI) scheme is not extended beyond 2009. The two sectors are doubtful of future growth prospects if they dont get similar tax breaks again. Although communications and information technology minister A Raja has already written to finance minister P Chidambaram, seeking a 10-year extension of the scheme that exempts software companies from tax, one is not sure if that will happen.

STPI was formed in 1991 by the government with an objective of encouraging, promoting and boosting software exports from India. STPI maintains internal engineering resources to provide consulting, training and implementation services.

Under the scheme, 100% tax deduction on profits under Section 10A and Section 10B of the Income Tax Act is available only up to March 31, 2009. The companies will have to pay tax at an estimated rate of 33.99% in the absence of these deductions.

Other countries are offering incentives such as tax holidays, free space, reimbursement of salaries and training costs to attract MNCs. Besides, they have superior infrastructure, resulting in lower operational cost. Any extension of the STPI incentives will provide a level-playing field not only to small and big companies, but also to India and other countries.

Software industry body Nasscom, in its pre-Budget memorandum to the finance ministry, suggested the tax holiday be extended up to 2019 to help sustain growth of the BPO sector. The industry has a valid pointthe IT sector enjoyed tax breaks for over 30 years, whereas the five-year-old ITeS industry had little time to benefit from this.

The industry has cautioned, if the scheme is not extended, investors may avoid India and opt for locations like

China, Sri Lanka and the Philippines. And this is why most believe that the government stands to lose more in terms of indirect taxes than it will gain from taking away the tax breaks, says Sam Chopra, president, Business Process Industry Association of India.

Nasscom has time and again stated the government should think about small companies that cant afford SEZs, and also BPOs, which are moving to Tier II and Tier III cities. Extending the STPI scheme will also help offset the losses incurred due to the movement of rupee, which has appreciated 13% since April 2007.

Small and medium companies cannot migrate to SEZs because of high cost of relocation. Large companies can still go to SEZs, but SMEs will have no option but to pay taxes, said an industry expert.When the STPI was formed, Indias IT exports were worth Rs 50 crore.

There are 48 centres of the STPI throughout the country and about 95% IT sector units are directly connected to the STPI.

Of more than 6,000 units registered under STPI, 4,200-plus have exported software in FY06. The member units of the STPI have exported software worth over Rs 1,00,809 crore by the end of FY06, against Rs 74,019 crore in FY05a growth of 36%. The highest exports by STPI-registered units were from Karnataka (Rs 37,000 crore), Maharashtra (Rs 15,500 crore) and Tamil Nadu (Rs 13,960 crore).

According to the Indo-American Chamber of Commerce, the tax holiday will help over 95% of SMEs that offer IT products and solutions to the US and other destinations.