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IT industry clamours for tax sops in India to ease pain

The industry wants the government to prolong a 10-year income tax waiver on the exports of software makers and outsourcing firms, and ease service and fringe-benefit taxes, said the country’s top technology grouping Nasscom.

The tax holiday has been a key factor in the growth of the Indian IT and business process outsourcing (BPO) industry, whose revenues are seen growing by more than 33 percent to 64 billion dollars in the year ending March 31.

Its looming end next year threatens to blunt the competitive edge of small IT firms that are unable to make investment plans because they are unsure about the tax implications they face, Nasscom president Som Mittal said.

“Encouraged by the success of our business model, countries like China have started offering tax incentives and other sops to IT companies,” Mittal said in an interview Tuesday.

“It is important to extend the tax holiday so that Indian companies remain competitive,” he said. Extending the tax exemption a year before it lapses would reassure firms that they could proceed with investment and hiring plans.

Export-oriented special economic zones that are now cropping up in India offer a five-year, 100-percent tax holiday, but small companies can’t either find or afford space in the enclaves, according to Mittal.

India’s IT sector, which has 1.6 million employees, has led the economic charge to annual growth of nine percent and was perceived to have become resilient enough not to need tax breaks beyond next year.

But a clamour for prolonging the tax incentive, under the so-called Software Technology Parks of India (STPI) plan, has grown louder as the industry transits through painful times.

Export-dependent IT companies are already battling rising payroll and real estate costs, a potential recession in the United States -- their biggest market -- and the impact of an appreciating rupee.

The rupee gained more than 12 percent against the dollar last year, denting the local equivalent of export revenue. That’s especially painful for the IT industry, whose expenses are almost all incurred in rupees.

“The prospect of the tax holiday ending has added to the anxieties of IT companies,” said Tejas Doshi, an analyst at Sushil Finance.

“Their margins are already under pressure and now they are facing a higher tax burden. Extending the STPI scheme will be the most uncomplicated way of easing the pain.”

Exports are forecast to jump 28 percent to top 40 billion dollars in the year to March 2008. A tax starting next year would mean sizeable revenue for the government.

The prevailing view among policy makers is that the IT and BPO industry “has arrived and is quite self-contained,” said B. Ramalinga Raju, chairman of Satyam Computer Services, India’s fourth-largest software firm.

“However, the government has to join hands with the industry, like it did when the industry was nascent,” Raju said.

The revenue loss to the government would be offset by taxes that will come through jobs created in the industry, he said, adding: ”The more difficult problem to solve would be standing up to the China challenge.”

Macqurie Securities analyst Shashi Bhushan said he expects the government to provide “positive commentary” to ease anxiety at IT companies that saw their stocks hammered by investors amid last year’s tough times.

“If they extend the tax waiver for three to five years, it could provide a 10 percent uptick to IT stocks,” Bhushan said.