Tuesday, March 5, 2013

IT SECTOR: STPI EXTENSION

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 by Ashutosh Harbola

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 `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 `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.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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