Govt likely to extend sops to EoUs, STPI by another year

Move to benefit around 6,000 STPI units, 2,486 EoUs.

In a move that may both please and yet disappoint exporters, the Union finance ministry is likely to extend the income-tax benefits enjoyed by units covered by the Software Technology Parks of India (STPI) Act and those set up in Export Oriented Units (EoU) by another year — up to March 31, 2011.

An announcement in this regard is expected to be made by Finance Minister Pranab Mukherjee, while presenting the Union Budget on July 6.

While exporters will then enjoy tax benefits for another year, industry bodies had demanded an extension for five years, due to the slowing economy, and exporters across sectors are expecting more from the government.

Nevertheless, when announced, the extension will be the second lease of life for the popular export-promotion schemes.

The commerce ministry and its finance counterpart had long discussions on a year’s extension of the direct tax benefits till March 2011 in a meeting last week.

In its budget-related wish list, the commerce ministry had recommended a three-year extension of the scheme, while the industry has been asking for five.

Companies to benefit from this move include software majors like Tata Consultancy Services, Wipro, and Infosys Technologies, and hundreds of small- and medium-sized IT units.

Plus, biotech companies like Biocon, textile units like Gokaldas and multinational corporations like GE India which have subscribed to these two schemes.

There are more than 6,000 software units operating under the STPI scheme, and account for about 85-90 per cent of India’s software exports, which were nearly $47 billion in FY09.

Currently, there are 2,486 functional EoUs, which accounted for about 21 per cent of our exports in 2008-09.

However, due to the ongoing economic slowdown, exports from the units dipped 15 per cent in 2008-09 and stood at $35.7 billion, against $42 billion the year ago.

“This will be more of a political decision than an economic one. If the tax benefits are withdrawn, units operating under the EoU or STPI schemes will lose major export-related advantages. This could result in closure of units and job losses, something the government does not want,” said a government official close to the development.

STPIs and EoUs enjoy direct tax benefits through Section 10 (A) and Section 10 (B) of the Income Tax Act of 1961, respectively.

These provisions provide 100 per cent tax deduction on export related income.

While releasing the annual supplement to the Foreign Trade Policy in April 2008, then commerce minister Kamal Nath had announced extension of the tax benefits of the EoU scheme till March 31, 2010.

Later, P Chidambaram, as Finance Minister, had allowed a similar extension till March 31, 2010.

Experts say extension of the EoU scheme for three years is the need of the hour to facilitate new investments.

“A new unit takes about a year to be built. Hence, a three-year extension would mean that additional investments would come to the EoUs,” said L B Singhal, director-general of the

Export Promotion Council for EoUs and SEZs.

The EoU scheme was initiated in 1981 to boost manufacturing and exports, while STPI was started in 1991.

In fact, software companies taking advantage of the STPI scheme is thought also responsible for putting India in the global radar as a top software developer.

Indian merchandise export growth has in negative territory for the seven months at a stretch ending April 2009.

This has happened because of lesser demand from key markets in the US, Europe and Japan, which have been reeling under recession, induced by the financial crisis since mid-2008.