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Indian IT's reality check

Rahul Sachitanand     February 28, 2011
After two decades of leading a sheltered existence, India's $76 billion outsourcing industry has stepped out of its comfort zone, with tax benefits under the Software Technology Parks of India (STPI) program ending. In last year's budget, Finance Minister Pranab Mukherjee had extended the scheme, under which tech firms can avail themselves of a 100 per cent tax deduction on profits under sections 10A/B of the Income Tax Act by 12 months.

Now it appears he's removed this sop, as the IT industry has gained scale and large firms (which account for 60 per cent of the sector's revenue) no longer require this protective umbrella to sustain growth. Earlier, units set up using these benefits were eligible for a 10-year tax holiday if notified before March 2012 and operational by March 2014.

"Government has not considered the impact of this move on small companies," says Pallav Nadhani, Founder of Info Soft global, a Kolkata-based software product developer. "Our small scale and strict SEZ laws around not moving existing people or machinery, makes life difficult."

Large firms have already moved up to 90 per cent of their operations into special economic zones, as STPI benefits wound down. According to tax experts, outsourcing firms staying outside STPI would now be required to pay an effective tax rate of around 30 per cent (excluding smaller cesses and surcharges) and this could be a heavy blow for small enterprises, which account for 40 per cent of India's outsourcing industry. What's more, the imposition of MAT on SEZ developers and units could hurt firms who are headed there.

"The imposition of MAT on SEZ developers and units is retrograde as it seeks to impose tax on income received from investments made with a commitment of tax exemption. This is advancing the negative impact of the Direct Taxes Code and should have been avoided," says Dinesh Kanabar, Deputy CEO and Chairman Tax, KPMG.l

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