Though the country?s $50-billion IT industry is demanding an extension of the tax holiday under the Software Technology Parks of India (STPI) scheme, which is to expire in March 2011, data available with FE shows that more than half of the industry?s export revenue generated from such units (around $43 billion) will not be eligible for tax benefits even if the scheme gets further extension.

Moreover, registration of new units under the scheme is also dwindling with only 572 registrations in 2008-09 compared to 844 and 1,164 in 2007-08 and 2007-06, respectively.Instead, if the government does not extend the scheme, it could earn an additional annual income-tax revenue of up to Rs 20,000 crore.

The tax benefit under the STPI scheme was launched in 2000-01 in the heydays of the dotcom boom. Under the scheme, any unit that has completed 10 years of operation automatically becomes ineligible for the tax holiday. According to the available data, out of 6,539 operational STP units, 749 have become ineligible for tax benefits and 1,704 are over eight years old. Another 423 units will complete 10 years next fiscal. The scheme has served its purpose.

Around 95% of the industry?s revenues are generated out of units located in these parks.

The share of the IT units based in another tax shelter, the Special Economic Zones, comes a distant second. The STPI scheme, which was originally set to expire in March 2009, has been getting a yearly extension in the last two budgets. This time around, the department of IT has recommended that STPI benefits should be brought at par with those of the SEZ Act–more broad based.

Though individual company-wise data is not available, analysts said a majority of units which have become ineligible for the tax benefits or are set to fall in this league would belong to large IT firms, which were early-birds in availing such benefits.

This means, according to industry estimates, 90% of industry profits come from the top 50 firms. For instance, of the country?s second largest software firm Infosys Technologies, three out of its four STP units would move out of the tax umbrella next year, bringing a neat quantum of its profits under the tax net. ?Our tax liability will go up to 25% next fiscal from around 21% in the present fiscal on account of this,? V Balakrishnan, CFO, Infosys, told FE.

Almost similar is the case with India?s largest IT firm, Tata Consultancy Services, which expects its tax liability to go up to 18-19% next fiscal with some of its units coming under the tax net. Its tax outgo for the quarter ended December 2009 was 15.5%. S Mahalingam, CFO, TCS, said that all the expansions in the last three or four years is being done through SEZ. ?So as a percentage, SEZ revenue continues to go up within the organisation. However, the scheme should be extended for the betterment of the whole industry,? he said.

?The extension of STPI, if at all, should be only for the small and medium companies, as the larger firms will be relatively insulated from its discontinuance due to their investment in SEZs,? said KR Girish, senior partner BSR and Co.

Around 62% of all SEZ are IT/ITeS, as all large IT firms are directing their future growth to them. ?Maybe the extension should have a rider and should only be for small and medium companies, which are finding it difficult to move to SEZ units,? added Girish.

According to an analysis done by KPMG, the tax liability of all large IT firms (with revenue higher than Rs 1,000 crore) would be around 22%, however, the profits of all other firms, including the ones with Rs 100 crore and less of turnover, would be taxed at a much higher rate of 30% if the scheme is not extended.

Raju Bhatnagar, vice-president, BPO and government relations, Nasscom, said that incentives have to be structured in a way that not only the small and medium businesses benefit out of it but also the tier-II and tier-III cities, which are largely left out when it comes to SEZ as there is not a very good business case for them.