Back in 1999, when the 10-year tax holiday for the IT industry was announced by the Indian government, IT was the sunrise industry. Nearly a decade later, the scene is starkly different. An appreciating rupee is gnawing into margins even as fickle markets treat the industry with disinterest reserved generally for old economy industries.
It is, therefore, not surprising that the industry has been vociferously demanding continuation of tax concessions under the Software Technology Parks of India (STPI) scheme beyond the sunset clause of 2009.
Under the STPI scheme, companies operating out of a software technology park are exempted from paying tax on their export revenue.
“Phasing out the tax holiday is indeed a matter of concern as it would in part impact the competitive advantage that India holds over many other low-cost and high quality locations,” says R. Chandrasekaran, President and Managing Director, Cognizant. “The growth and sustainability of this industry in part is because of the tax breaks extended by the government.”
Basically, other locations like China and Vietnam that are below India in the IT and outsourcing pecking order might stand to gain because they are offering similar incentives for the industry. Nasscom President Kiran Karnik says that the lapse of the holiday is a matter of “grave concern.”
But the pinch of the taxation is likely to be mitigated for the larger players who are moving into Special Economic Zones (SEZs), where they will enjoy similar benefits on their exports.
Cognizant, for example, has announced that it would spend $300 million “to construct multiple fully-owned techno-complexes measuring approximately 4.5 million sq. ft of capacity in SEZs to accommodate 45,000 professionals.” These will be spread across multiple locations in India, including Chennai, Kolkata, Coimbatore, Pune and Hyderabad. Infosys, recently, secured clearance for setting up SEZs in Rangareddy district in Andhra Pradesh. Biggies like Wipro, Genpact, HCL have also secured approvals to set up SEZs in various parts of the country.
Karnik says: “The impact on the bigger players of the industry like TCS, Infosys, and Wipro will be relatively lesser as they can afford to leverage the SEZ opportunity. They have the wherewithal to afford large campuses in the SEZs. It’s the smaller players who will be badly hit as they cannot afford to pick up space in the SEZs.” Karnik also contends that SEZ developers might charge smaller companies premium prices because they would be aware of their condition.
“In the longer run, it could prove to be a severe deterrent for smaller companies….it is like infanticide,” sums up Karnik, who has been lobbying with the government to get an extension on the tax holiday.
It’s a predicament that even the bigger companies like Cognizant sympathise with. “The main intention of allowing SEZs by the government is to infuse additional capital and create additional employment. SEZs will help only in infusion of fresh investment. It cannot mitigate the negative impact on the current work of existing companies—specifically smaller companies,” says Chandrasekaran.