Anomalous tax breaks

India's information technology (IT) sector may be keeping its fingers crossed about the government extending the Software Technology Parks of India (STPI) scheme beyond 2009, but the government appears to be in no mood to relent. A recent notification has excluded IT parks from the Industrial Park Scheme, even as entrepreneurs have invested in IT park projects over the past two years, believing they would benefit from the tax holiday. The finance ministry thinks the IT sector "" which expects to cross $40 billion in revenues this financial year from software and services exports alone "" is now fairly large and should not continue getting tax breaks beyond March 2009, when the STPI scheme ends. The department of information technology, on the other hand, is pushing for a two-year extension of the tax concessions, reasoning that the tax cushion will help smaller players.

North Block's concern is revenue loss. Without the 100 per cent tax deduction on profits under Section 10A and 10B, IT firms will have to pay tax at the usual rate of 33.99 per cent, whereas if they had full tax exemption under industrial parks, they would have nothing more than the minimum alternative tax of about 11 per cent. The issue here goes beyond the government's balance sheet, because IT firms as well as the developers of industrial parks argue that this is a case of changing tax laws with retrospective effect. The parks scheme was extended from 2006 to 2009, but the tax notification has come only last month. In the interim, many developers have invested in industrial parks, only to find that the rules have been changed. Some of the other changes (the total allocable area has been raised, the maximum space to be occupied by one company has been halved, only the initial developer can claim the tax benefit, and so on) are all designed to reduce any tax loss. The finance ministry's desire to minimise tax giveaways is entirely understandable, but at issue here is also the question of being fair to promoters and investors who have been functioning in the belief that the old rules that prevailed till 2006 would continue.

As for the IT sector's claim to tax concessions, they lost their legitimacy a long time ago. The sector has grown from 1 per cent of GDP to about 5 per cent today, and has certainly reached maturity as well as global scale. Besides, the industry has grown not so much because of a tax holiday but because it exploited a global opportunity. To be sure, IT companies now face cost pressures because of rising salaries, and the rising rupee has squeezed margins. But these are problems faced by all companies in all sectors, they are not peculiar to the IT sector. Indeed, it might be argued that the IT sector continues to enjoy profitability levels that, while having dropped, compare favourably with most other sectors and with their competitors in other countries. The irony of course is that even as the door has been closed on the sector when it comes to industrial parks, many large IT firms and even some of the smaller Indian IT service providers have set up new units in special economic zones where they will continue to get tax benefits.