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IT hopes rest on tax holiday extension

The Indian IT and BPO industry is awaiting this budget with bated breath. It is anticipating an extension of the 10-year tax holiday that ends in 2009, reports Venkatesh Ganesh.
By Venkatesh Ganesh | Hindustan Times, Mumbai
UPDATED ON FEB 20, 2008 09:14 PM IST

The Indian IT and business process outsourcing (BPO) industry is awaiting this budget with bated breath. It is anticipating an extension of the 10-year tax holiday that ends in 2009.

The tax holiday assumes significant importance for these companies and the economy in general since software exports by Indian companies have grown 30 per cent on an average, which these companies believe could be derailed thatin turn would affect the employment scenario in India. Currently, the IT and BPO sectors employ 2 million professionals and adds 5.5 per cent to the country's GDP, according to Nasscom.

Faced with a slowdown in the US economy, from which Indian companies earn a bulk of their revenues at about 70 per cent, companies feel that if the tax holiday is not extended this could wipe out some BPOs and IT companies.

"If this special benefit is extended beyond '09 it would further erode the expansion and development prospects of the BPO sector," says Som Mittal, president, Nasscom. The government however has opened SEZs all over India and feels that companies can move to these SEZs to avail of tax benefits. However, Nasscom feels that small and medium-sozed companies cannot be expected to move their operations to SEZs as that would involve more costs.

Also, a lot of BPOs now are moving to tier II and tier III towns to address high wage costs. However, there are no SEZs in these places.

He added that the government should treat BPO as a different industry, which is nascent and have been set up after the year 2000 and has not enjoyed tax benefits that IT companies have enjoyed. "The BPO industry in India is still a young industry and needs the support of the government till it reaches a phase of growth and maturity," said an Intelenet spokesperson.

Then there is the issue of competitive advantage that Indian companies enjoyed over other countries predominantly because of low costs. With China and other low cost destinations like Philippines and Vietnam offering cost advantages, employment would be affected.

Also, fringe benefit tax (FBT) which is a tax that companies have to pay for perks given by them to their employees such as health, life insurance, hotel stay and pensions is affecting the companies' bottomlines.

"The introduction of FBT for ESOP is a retrograde step as we reward employees in knowledge industries, particularly in start-ups, and needs to be supported to ensure the growth of these industries by attracting talent," said Subhash Menon, MD, Subex Azure.

Quatrro BPO head raman Roy says that the government is not ploughing back the 2 per cent education cess and companies have to bear the extra training expense due to lack of trained manpower.

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