The Software Technology Park of India (STPI) scheme, which has been a big help for small and medium IT companies, is likely to be retained in a modified form beyond the March 2011 deadline. The department of information technology (DIT) is working with the finance ministry to formulate the STPI variant in which the tax benefits would be linked to investment instead of profit. An announcement is expected in Budget 2011-12.
Investment-linked tax benefits (accelerated depreciation) which are touted as more efficient and better targeted than profit-linked ones are the new norm of tax policymakers. The concept also permeates the Direct Taxes Code Bill 2010 before Parliament.
According to a DIT official, IT companies that invest in tier-II and III cities will get tax benefits under the proposed modified STPI scheme. ?Though we are still working on the contours of the incentives, what is being thought of is a certain moratorium on tax payment if companies invest in tier II and III cites. Also, taxes will be reduced if the projects are more viable and the project document says so,? explained the official.
The idea is to ensure that small and medium IT firms outside the special economic zones (SEZs) are put on a par with their counterparts located in other SEZs when it comes to tax benefits. SEZs are also seeing a shift to investment-linked incentives.
However, IT industry may not be content with the modified STPI as investment-linked incentives mostly benefit capital-intensive industries. The IT industry feels that more than incentives, the government should offer better employment linkages.
?The IT industry is not focused on investment unlike the manufacturing industry. Employment linkage, particularly in next tier cities, would have been better,? Zensar Technologies vice-chairman Ganesh Natarajan said.
In fact, the DTC Bill seeks to dilute the incentives to SEZs as well by covering these zones under the MAT and DDT regimes, besides replacing the profits-linked tax benefits with investment-linked ones. The Bill proposes to extend tax holiday based on export profits to existing SEZ units as also those which will be set up before March 31, 2014.
Under the STPI scheme slated to expire in March 2011, tax exemptions are provided to firms under Section 10A and 10B of the Income Tax Act.
The (profit-linked) incentives and facilities offered to the SEZ units for attracting investments are 100% income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. ?There is a challenge to (STPI beneficiaries) from the SEZs. Hence, the need to modify the scheme,? the DIT official added.
?We will continue with the SEZ scheme and we have agreed to increase the SEZs though the area requirement for the SEZs in tier II and III cities has been reduced. However, for our industry, we do not need investment incentives but those related to people. We had asked the finance ministry to encourage employment and innovation,? Nasscom president Som Mittal said. According to the DTC, a profit-linked incentive is regressive in nature as there is an inbuilt incentive for laundering and shifting of profits to the exempted activity. Since profit is the basis for exemption, there is no-incentive for investment and upgradation during the period of tax holiday. Such profit-linked incentives also lead to significant loss of revenue and encourage rent-seeking behaviour.