India’s IT industry is a well-chronicled success story. The industry believes that its success had more to do with benign neglect by the government and less with any active assistance.
This is only partly true. Schemes, such as the Software Technology Parks of India (STPI) one, had a role to play in creating this success story. Under this scheme, launched in the heyday of the IT boom in 2000, the government provided a 10-year tax holiday to IT firms. The STPI scheme was to expire in March 2009, but has been extended twice under pressure from the industry, which has cried and whined about competition from other “low-cost” countries.
The rise of the special economic zones (SEZs) that provide a tax holiday of 15 years for firms based in them should have been an attractive alternative. Except the Income-tax Act clearly says that existing businesses—ones that have already enjoyed the 10-year tax holiday—cannot take advantage of it. Only new business can avail of the tax exemption while being located in SEZs. This, as a Mint story on Thursday shows, is creating new problems, both for the industry and the government.
Large players in the IT industry—Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd—can afford to take the tax hit, goes one popular argument. For small and medium firms, the 34% tax that they might have to pay once the STPI scheme expires on 31 March 2011, might render them uncompetitive. In such a situation, the temptation to sneak in existing business into SEZs under various guises is pretty high.
Companies in the business argue that the Indian IT and back-office services sector is a major growth driver for the economy creating high paying jobs and that with countries such as China and the Philippines offering tax incentives to firms in the same business, India cannot afford to hobble its industry.
This newspaper has consistently argued against incentives, sops, and special dispensations, and, where they already exist, their permanence. Incentives distort economic reality; the direct tax code, before it became a victim of lobbies, sought to do away with them. The government should have never extended the STPI scheme. And it should definitely not allow companies in the IT and back-office services business to move existing businesses to SEZs. The average effective rate of corporate tax for most companies in India is around 20%. If, after two decades of existence, the Indian IT industry can’t pay taxes and be competitive, maybe it doesn’t deserve to compete at all.
Should the government extend tax sops for the IT industry under the STPI scheme? Tell us at email@example.com