Software sector banking on tax benefit extension

India’s information technology (IT) sector is hopeful that the upcoming Budget will address some of its major demands, including an extension of tax benefits under Sections 10A and 10B of the Software Technology Park of India (STPI) Act; removal of the multiplicity and inequity of taxes; acceleration of IT adoption in government; and focus on policy measures to provide a fillip to the IT hardware industry.

Extending STPI tax benefits beyond 2010 (it was extended by a year in 2009) has been a long-standing demand of the software sector. IT and Telecom Minister A Raja has assured the industry that he has asked the government for a three-year extension.

Under Sections 10A and 10B of Indian tax laws, software companies are currently granted a tax holiday on income generated out of STPIs — a concession that brings down the effective tax rates to 12-15 per cent, compared with the peak effective corporate tax of 33 per cent.
 

THE WISH-LIST

Software industry’s demand

* Extension of availability of benefits under Section 10A/10B for STPI/EOU units

* Amendments in Section 10AA of the Income Tax Act

* Removing multiplicity and inequity of taxes

* Acceleration of IT adoption in government

* Nationwide broadband rollout

* Education and skill-building

Hardware industry’s demand

* Continuation of 8% excise duty/CVD on all IT products

* Abolition of 4% Special Additional Duty

If the STPI tax benefits are not extended beyond 2010, these companies will effectively end up paying almost 33 per cent in taxes since they do not have the financial muscle to get into special economic zones (SEZs). The top 10 companies which have moved around 30-40 per cent of newer units into SEZs may end up paying 18-22 per cent tax if the benefits are not extended.

“While large IT players can move their businesses into SEZs, it is the SMEs who will be hurt the most. To facilitate their continued growth, the government should extend the STPI Act’s benefits which will end in 2010,” Nasscom President Som Mittal said.

“Countries like the Philippines, China and others are providing several incentives for their IT industry to grow. The government will have to act now,” a senior official from a BPO firm added.

In line with the demands of the hardware industry, the Manufacturer’s Association for Information Technology (MAIT), stressed the need for growth-oriented measures to boost domestic IT consumption.

The IT industry has also been asking the government to give a push to the e-government projects (beneficial to both the hardware and software sectors), which will help in connecting the hinterland with better technology access.

“Given the proven benefits of technology usage in programmes like NREGA to speed up development and enable efficient public administration as well as deliver government services to the citizens’ doorsteps, the new government should embark on a $5-10 billion investment programme in e-governance initiatives,” said S Ramadorai, CEO and MD, TCS.