Tax incentives to IT sector

The government is set to extend the blanket tax exemptions provided to software companies in order to boost the IT industry, which has become one of the biggest casualties of the global financial crisis. The Software Technology Parks of India (STPI) scheme that grants a ten-year income-tax holiday under Section 10A of the Income-Tax Act is expected to continue beyond its March 2010 deadline in a move that should help smaller players.

India’s top IT Companies do not need this support as they have already invested in special economic zones, which offer liberal tax breaks. Extending the STPI scheme will help second-rung Companies stay afloat as they cannot afford the fresh capital investment downturn expected to last well into 2009-10, the proposal to give the sector sops was discussed by the apex committee set up by the government in the aftermath of the global financial crisis.

 The panel met on Wednesday evening to finalise the modalities of a second stimulus package, expected to be announced next week. “Extension of the STPI scheme will be a welcome move as next year is expected to be even worse, especially for the BPO sector and small & medium players,” said Ganesh Natarajan, Nasscom chairman and deputy CMD of Zensar Technology Ltd. While 70% the of the country’s IT exports consist of non-discretionary expenditure such as maintenance contracts, the remaining 30% includes research & development activities, or discretionary spends, in which mainly smaller Companies are involved. “During a slowdown, discretionary expenses are the first to be struck off the list by international clients. Extending the sunset clause of the STPI scheme will give smaller Companies a chance to build long-term business,” Natarajan said. Abhisek Goenka, partner, BMR Advisors agrees. “This will reduce costs for IT Companies that were planning to shift to SEZs after March 2010 to continue enjoying the tax exemptions.” Benefits under the STPI and Export-Oriented Unit schemes were to expire in March 2009. Both were extended by a year by former finance expects the Indian IT sector to grow at around 21% in 2008-09, compared with 29% last fiscal. While it is yet to arrive at any projections for 2009-10, growth is expected to slow further in line with the world economy.

The spectre of job cuts is looming across the IT sector world over. While Silicon Valley in the US has already laid off 38,000 workers since September, Companies in India have already reportedly axed around 10,000 jobs in the current quarter. By all indications, the situation is expected to get much worse. The apex committee, at its meeting on Wednesday, also discussed other measures such as a further easing of monetary policy with a possible 100-basis point cut in key rates, along with further duty cuts and concessions for the real estate and export sectors. The package is expected before New Year.