The tax holiday provided to Indian IT companies at the dawn of this century was historic and path breaking, as it enabled the industry to reach the enviable stature that it enjoys today. But retaining this tax holiday doesn't make sense from a futuristic perspective
It was one of the few instances when the Indian government actually played a key role as an enabler for business. The tax holiday given under the Sunset Clause u/s 10A and 10B of the Income Tax Act for companies operating under Software Technology Parks of India (STPI), which provided massive exemptions for the IT industry in India, was launched in the heydays of the dotcom boom in 2000-01. The incentives were available for providing software and IT enabled services for 100% exports including exports of physical services and included exemption in custom & excise duty, reimbursement of Central Sales Tax and exemption in corporate tax on 90% of export turnover (applicable for 10 years).
The dotcom boom fizzled out, but the tax holiday has been a major component of India's success as a global outsourcing hub, making more than 8000-odd IT units more competitive. In 1990, the Indian IT industry generated a mere $150 million in software and computer-related services. In FY 2008-09, the Indian IT-BPO sector had reached $71.7 billion in aggregate revenue. Software and services exports (includes exports of IT services, BPO, Engineering Services and R&D and Software products) reached $47 billion, contributing nearly 66% to the overall IT-BPO revenue aggregate.
Ever since the golden decade came to an end in 2009, a debate has been raging on whether it needs to end at all. IT companies pressed for an extension by three years, but were granted only one. In the 2010 budget session, Finance Minister Pranab Mukherjee declared that the holiday will not be extended. Industry association NASSCOM and a number of players feel this will seriously hamper India's competitiveness. Arvind Goyal , Director-Finance, Pitney Bowes India Pvt. Ltd. cautions that this will also reduce India's attractiveness as he says, 'Local duties and tax structure do play a. vital role in swaying decisions of global IT players in favor or against of setting up captive center in one of the countries.' Infosys Chief Mentor Narayana Murthy however feels that the extension isn't needed from Infosys' perspective. It's been almost 20 years since the sector has been awarded some or the other kind of benefits. These benefits made sense when the industry was at a nascent stage. In 2009, IT services alone have grown up from $13.5 billion to $35.2 billion since 2005 with exports contributing 76% (CAGR of 32% in 2000-2009 period). Direct employment in Indian IT-BPO sector crossed the 2.2 million mark, an increase of about 226,000 professionals over FY 2008 and indirect job creation is estimated at about 8 million. As a proportion of national GDP, the sector's revenues have grown from 1.2% in FY1998 to an estimated 5.8% in FY2009. Net value-added by this sector, to the economy, is estimated at 3.5-4.1% for FY 2009.
Understandably, the government's point of view is that the sector is self sustaining and its time to provide incentives to other sectors that need them more. The total revenues foregone by the government due to tax holidays for the'IT and ITES Sector are Rs.269.76 billion for the fiscal year 2009-10 while overall revenues foregone on account of corporate and non-corporate tax concessions are estimated to'be Rs.842.97 billion. After all, the government needs to scale up its budget size, cut down expenditure on interest payments and invest in agriculture and other unorganized sectors, which constitute 90% of the workforce in India.
Still the IT industry is moving to the SEZ's now to grab tax benefits. But small and mid -sized companies will never be able to make it there because of high land cost and higher tax rates. BPOs will have to look for newer destinations as it will be a tough survival call for them indeed. Companies who deal in volumes are moving to the special economic zone. Praveen Bhadada, Manager-Consulting, Zinnov Management Consulting Pvt. Ltd. feels the impact is minimal at around 2-3% as he says, 'Cost savings that the companies are able to generate operating out of India are far greater as compared to the tax burden that this withdrawal may result in.' Moreover, Indian IT companies need to urgently move up the value chain and provide lines of business and executive management related offerings. This decision against extending the tax holiday could actually push the fitter ones to make the inevitable evolution. So it does appear that the IT industry is raising unnecessary alarm on the issue; though it may be argued that smaller players may need protection. Goyal of Pitney Bowes India agrees, 'Indian industry should be able to reap the dividends of the reference architecture they have created by early mover advantage.'
Financial subvention for weak industries is logical and desirable, so that they may achieve their potential. But after these industries reach a certain scale, it enters the realm of protectionism, which helps no one. The Indian IT sector must take several key steps to take the next leap forward. In our view, pushing for STPI extension isn't one of them.
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