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Loss of tax sops to harm Indian IT

india Updated: Feb 09, 2007 20:51 IST
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The Indian software services sector is dreading the combined impact on industry margins of wage inflation and the ‘sunset’ clause in the Software Technology Parks of India (STPI) policy.

The industry expects at least a 20 per cent loss of possible revenue. More importantly, this can shave off half or more of the cost advantage enjoyed by it and put its global competitiveness under threat, the industry says.

The government’s tax sops for information technology firms registered with the STPIs range from exemption from income-tax under section 10A of the Income-Tax Act and total customs duty exemption on capital goods imports. STPI firms also get 100 per cent excise duty exemption on indigenous procurement and a tax waiver on domestic sales up to half the foreign exchange earned by the unit. All this is set to end by 2009.

The bigger players are banking on relocating to tax-exempt Special Economic Zones (SEZs) to ensure business continuity. But small and medium enterprises may not be able to do so, since the minimum size of the enterprise for an SEZ unit should be 25 acres.

In the SEZs too there are some fine print clauses, which can make some companies a bit uneasy. They may decide to add people in Philippines, Malaysia or China, which offer more flexibility. "The loss of employment and the work to competition will mean net loss of revenues for the government in any case," says Satyam Computers Chairman B Ramalinga Raju.

"Contrary to perception that the government has had nothing to do with software services sector, we feel it could not have accomplished what it has if it was not for enablers like the STPI policy. The move to shift this industry to SEZs would mean that there will be no more ventures starting in garages or apartments in future," says industry body National Association of Software and Services Companies (NASSCOM) president Kiran Karnik. NASSCOM has pitched for an extension of the current STPI regime by another decade.

Nasscom has a total membership of 1100 that accounts for over 95 per cent of the revenues of the software industry. Nearly 600 of the members fall in the small or medium category.

"SMEs will not have the capacity to build or occupy independent SEZs and will have to rent part of large, expensive and  multi-product SEZs that may prove to be a sub-optimal alternative. There is no way they can sustain the cost advantage with the added capital expenditure," claims NIIT Technologies chairman Rajendra S Pawar.

Even for bigger players, the shift to an SEZ could entail business disruption. So they have to put in an extra effort, sign new contracts with clients and employees and do the drill all over again in relocating them. There will also be redundancies as far as infrastructure outside of those SEZzs is concerned.

All this could be done away with if government adopted the concept of virtual SEZs, says TCS CEO and MD S Ramadorai.

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