The Union Budget 2010 has left the IT industry disappointed and rushing to the finance minister seeking clarifications over the continuance of
the STPI status for software companies.
The apex organisation of IT companies, the National Association of Software and Services Companies (Nasscom) initially did not issue any comment for hours after the Budget speech. A Nasscom spokesperson also indicated that the Association would be seeking certain clarifications from the government.
The Finance Minister, in his Budget speech, did not mention anything about the Indian IT industry’s long-standing demand of granting extension to Software Technology Parks of India (STPI) scheme beyond 2011.
In its Budget last July, the government had extended tax benefits for units in STPI by a year to March 2011. Units set up in these parks are eligible for a 10-year tax holiday, besides other perks.
A number of small and mid-size outsourcing companies function from designated STPI units. As things stand, tax benefits to such units will be phased out after the fiscal year 2010-11.
The BPO industry, in particular, could not hide its dismay. “I am disappointed that the tax holiday under Sec 10A and 10B has not been extended. The BPO industry is a young industry as compared to the IT industry. A longer term extension of the tax holiday would have certainly been beneficial considering our export-oriented revenues have been affected by the global recession as well as pressure on price,” said Ramachandra Panickar, Chief Financial Officer, Intelenet Global Services.
However, many large outsourcing firms have set up shop in special economic zones (SEZs) and will not be impacted significantly. Exports from SEZs are eligible for exemption for a period of 15 years in all – 100% of profits are tax exempt in the first five years, 50% in the next five and 50% in the last five years provided the profits are invested in specified areas.
“The top 50 software companies contribute 60-65% of the revenues of the industry and 90% of the profits. When they grow their business, they will grow into SEZs. Many of the older units have already come out of the purview of tax benefits offered under STPI because they are older than 10 years. It is the smaller firms that have set up STPI units in last few years that will be hit though the government will not gain much in terms of tax inflows,” according to a Nasscom executive.
Noting that the IT industry had hardly found any mention in the Budget this year, Infosys director TV Mohandas Pai said that the industry’s “main request to extend the STPI exemptions had not been considered.”
In its official reaction, Nasscom too noted that there was no move towards announcing parity of incentives between the STPI and the SEZ scheme which is necessary for small companies and development of tier 2 and tier 3 cities. “In line with our recommendation, the IT Taskforce formed by Department of Technology (DIT) had also strongly recommended that the STPIs be brought at par with the SEZs,” read the statement.
“Tax benefits under the STPI Scheme are available till March 31, 2011 and we will engage with the government and through the Ministry of IT to represent for an equitable benefit to the SME sector,” it added
According to Munish Gupta, vice-president, India Operations, GlobalLogic, “IT industry has nothing really to look forward. Though during the
current fiscal year, the IT sector witnessed a significant revival in revenue and the growth is upbeat for the coming calendar year, also there was no mention of extension of a tax holiday scheme for software firms in the minister’s speech.”
The government had introduced the Software Technology Parks of India (STPI) scheme in 1991 to encourage software exports, which helped make India one of the world’s leading hubs for software and business process outsourcing.
While hailing the Budget as “positive overall”, Nasscom also expressed disappointment that the increase in Minimum Alternate Tax (MAT) will result in a burden on small and medium businesses who are still struggling with the impact of the global recession.
According to Pai of Infosys, “The increase in MAT will not impact the larger companies as much but will impact smaller and medium enterprises (SMEs), particularly in the IT sector, as they would have to pay more.”