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IT industry in India clamors for tax sops to ease pain PDF Print E-mail
Friday, 29 February 2008

Agence France-Presse . Bangalore

India's flagship information technology industry is seeking a dose of government benevolence in the federal budget Friday as it grapples with multiple uncertainties.

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 industry, whose revenues are seen growing by more than 33 per cent 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 per cent 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 per cent 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 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 per cent 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 per cent 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.

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