The countdown seems to have begun for India’s information technology sector with the government indicating that that it was not in favour of extending the tax benefits under the Software Technology Parks of India (STPI) scheme beyond the original timeline of 2009.
“Tax breaks are provided to support an industry at early stage. IT industry has grown and gained strength. Though, no final decision has been taken but I do not think STPI benefit would be extended,” Central Board of Direct Taxes (CBDT) chairman R Prasad said in Kolkata.
“Exemptions are not perpetual. There has to be sunset clause,” he said.
Under the STPI scheme, 100 per cent tax deduction on profits under Section 10A and Section 10B of the Income-Tax Act is available only until March 31, 2009. The companies registered with the STPI will have to pay tax at an estimated rate of 33.99 per cent in the absence of these deductions.
IT companies are already feeling the heat of an appreciating rupee that has risen by over 12 per cent during the past 12 months. With the world’s largest economy US staring at a possible recession, fears 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,” the Electronics and Computer Software Export Promotion Council (ESC) has said.
Industry body National Association of Software and Service Companies (Nasscom) says the STPI scheme has proven to be a big success and a major contributor to the growth of Indian economy. The industry body said that not extending the tax break could result in severe job losses.
Smaller companies are finding it difficult to rent space in tax-exempt special economic zones (SEZs) as enough capacity is not always available in the right location to help the industry that revolves around skilled workers. Also, the 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 companies are moving to tier II and tier III cities where there are no SEZs,” Nasscom has said.