Silence on STPI deafening, says IT industry

IT industry trade body Nasscom plans to meet Finance Minister P Chidambaram to make a representation seeking an extension of the Software Technology Park of India (STPI) scheme and clarity on transfer pricing among others issues.

Termed as a sunset clause, the benefits under STPI "� including a 10-year tax holiday on exports and corporate tax exemption for 10 years "� will end on March 31, 2009. Nasscom President Som Mittal, however, did not specify a time-frame for the meeting, but added that the industry has over one year to work on this.

The minister has also proposed an increase in excise duties on packaged software to 12 per cent from the earlier 8 per cent. Customised software is also to be taxed.

Former Nasscom President and Chairman of Mastek Ashank Desai pointed out to an advanced ruling on transfer pricing (meaning taxes are fixed in advance) which the Nasscom representation "will try to clarify and sort out".

The transfer pricing legislation was introduced in India in 2001 and has emerged as the single biggest source of courtroom battles between tax authorities and companies.

Mittal, however, maintained that the main issue would be extension of the STPI scheme, while others were just "procedural" issues.

"The non-extension of tax holiday under STPI will impact employment generation in the IT sector. An extended tax holiday would have given some breathing space to the export-driven industry, which has been affected by currency appreciation, increasing costs and falling margins," said V Balakrishnan, CFO, Infosys Technologies.

Suresh Senapaty, CFO, Wipro, said, "The STPI extension request was not addressed. But we have one more year to go. It could very well happen in post-Budget announcements or in the next Budget."

Nasscom had predicted that due to this non-extension of STPI scheme, the impact on jobs would be 400,000 in 3-4 years. Analysts are of the opinion that at a time when the entire IT industry is battling higher wages, high level of attrition, cuts in margins due to rupee appreciation and a possible US slowdown, this would deal a serious blow to the industry.

PINC Research analysts note, "Current valuations and estimated earnings of the sector factor in a stronger rupee and higher tax rates post-FY10. The only big risk to earnings going forward would be a sudden appreciation of the rupee especially in FY10 when IT/ITeS companies would have to pay a higher tax. This could have a more acute impact on the profitability of that year."

At present, tech companies are paying only a minimum alternate tax (11.33 per cent). The tax bill of most firms will go up in the near future. The effective tax rate is expected to rise to 20 per cent after the expiry of the STPI scheme in 2009.

Under the current classification, over 70 per cent of IT/ ITeS firms in the country fall in the small and medium enterprise category, accounting for nearly 35 per cent of the country's software exports. These companies would not be able to pay full income tax as this would push up operating costs.

Large companies had the option of moving to special economic zones (SEZs) to avail of the tax incentives there, but smaller companies would not find it feasible to relocate their operations to SEZs which are often located in and around large cities. High rentals pose a cost barrier for small companies.

The end of tax holiday will also deal a death blow to over 1,000 export-oriented BPO units. It is estimated that once the STPI scheme expires in 2009, India will no longer enjoy the cost advantage it had so far, by sacrificing the 'cheapest' tag to the Philippines and other emerging destinations in the world.

Nothing can be more shocking than this for a 'toddler' industry, which is getting ready to corner $50 billion in revenues by 2012, from the present $11 billion as projected in a recent Nasscom report.

Currently, the Philippines is estimated to be around 5-10 per cent more expensive than India as far as business process offshoring is concerned.

Among other competing destinations, Vietnam is less expensive but yet to reach a competitive scale.

Malaysia is about 20-25 per cent costlier, whereas countries in central and eastern Europe such as Czech Republic, Romania, Hungary, Poland are about 30 per cent more expensive. China, battling with the shortage of skilled manpower, is more or less at the same level as India in terms of costs.