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IT companies look for space in special economic zones

— FILE PHOTO

IDEAL PARTNER: The Software Technology Park of India (STPI) unit in Vijayawada.

The entire IT-ITES sector was waiting for some announcement from Finance Minister P. Chidambaram on a possible extension of the Software Technology Park of India (STPI) scheme. It has offered tax exemption on export earnings under Sec. 10 (A) and (B) of the Income-tax Act. This scheme was introduced in 1999 and will be phased out in 2009, after a ten-year concession offered to the booming sector. Given the competition in the world market for outsourcing, the Indian IT indu stry, spearheaded by the National Association of Software and Service Companies (Nasscom), campaigned for the extension of the STPI benefits from 2006. But this has not come.

So, many IT and BPO companies are looking out for space in the special economic zones (SEZs) taking shape in different parts of the country.

On the one hand, nearly 60 per cent of the notified SEZs are for the IT-ITES sector. But industry sources say that they will be taken by the IT majors and the BPOs that many of them operate. It is the smaller and medium sized companies that will suffer with the closure of the STPI scheme and the tax benefits it offered. In order to retain some of these tax breaks, the smaller IT and BPO firms are now said to be booking space in the SEZs in convenient locations.

Nasscom sources say that SEZs will provide much the same benefits that the STPI scheme offered to the sector, but the very concept of SEZ was different — it was land based, meant specifically to benefit the manufacturing sector that wanted some concessions to retain its competitive edge.

Under the SEZ scheme, the units located in the zones will be eligible for: Duty free import, 100 per cent Income-tax exemption on export income under Sec. 10 AA of the Act for five years, 50 per cent for next five years, and 50 per cent of the ploughed back export profit for next five years.

The SEZ units will also get exemption from Minimum Alternate Tax (MAT), exemption from Central Sales Tax and service tax, single window clearance for all approvals, and even exemption from State sales tax and other local levies.

Besides the closure of the STPI scheme, the Finance Ministry was also bringing the IT sector under the ambit of MAT.

In his campaign for the extension of STPI benefits, former Nasscom president Kiran Karnik had said: “If India is to continue being the prime destination for IT and it needs to retain its market share in the outsourcing business, continuation of the STPI scheme is a must.”

He argued that it would be the large companies that could benefit from the shift to the SEZ, because large land requirement did not make sense to the IT companies. This industry was all about people and the benefits could be offered on the basis of built-up area.

Industry sources say that transport and communication was already becoming a major challenge to the IT-BPO sector.

The SEZs were normally located well outside a city, considering the requirements of the manufacturing sector. By moving further away from the core city, BPOs will have to provide for increased transportation and overhead costs.

The STPI was not geographically defined and could be set up anywhere with just a registration under the scheme. Given these decided advantages, the IT-ITES-BPO sector feels let down by the government’s decision to wind up the STPI scheme. Finance Ministry and income-tax officials are looking at new avenues for revenue mobilization to compensate for the other tax breaks and the loan waiver concessions announced in the budget.

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