Stung by a persistently rising rupee and prospects of a demand recession in the United States, the Indian information technology sector is staring at another roadblock if the government decides against extending the tax benefits under the software technology parks of India (STPI) beyond the original timeline of 2009.
Under the STPI scheme, 100 per cent tax exemption 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 per cent in the absence of these deductions.
The rupee has risen by over 12 per cent during the last 12 months and that has impacted earnings of IT companies, some of which have got into additional trouble in foreign exchange management.
With the world’s largest economy in the United States staring at a possible recession, ears are looming large about slowdown in demand in the US markets as companies their cut expenses to fight fall in earnings.
Analysts believe small and medium sized information technology (IT) firms could be the worst hit if the scheme is not extended beyond 2009.
“About 1,500 small and mid-size firms would have to shut their shops if the government does not extend STPI scheme beyond 2009,” Electronics and Computer Software Export Promotion Council (ESC) has said.
The National Association of Software and Service Companies (Nasscom) said the STPI scheme has proven to be a big success and a major contributor to the growth of Indian economy. Large companies are setting up special economic zones (SEZs) that enjoy export tax exemption, but smaller companies are finding it difficult to rent SEZ space as enough capacity is not always available in the right location.
Also, SEZ rentals are very high with developers skimming the cream.
“Small and medium enterprises (SMEs) cannot be expected to move from their present base to other locations where there are SEZs. Also, business process outsourcing (BPO) companies are moving to tier II and tier III cities where there are no SEZs,” Nasscom said.
Smaller towns where real estate is cheaper and scaling up of operations based on cost-effective workers are possible. But what the BPO companies gain here could be lost in higher taxes. All eyes are on the Finance Minister. Will he extend the STPI benefits further?