IT companies hauled up over shifting ops to SEZs

IT companies hauled up over shifting ops to SEZs

New Delhi: The government has reprimanded two IT firms for shifting their existing operations to special economic zones (SEZs) and denied permission to two others that sought to do the same.

Government officials say the companies had shifted or were planning to shift their existing business to SEZs—something that isn’t allowed under the law, which states that only “new business" in such zones is eligible for tax benefits.

Interestingly, the two units that have had their operating licences scrapped on 18 October, were allowed by the unit approval committee, the government body under the commerce ministry that oversees SEZs, to operate in the special economic zone in anticipation of a special approval from the ministry of commerce that never came.

Geometric Ltd, listed on the Bombay Stock Exchange and the National Stock Exchange, and Stratify Software India Pvt. Ltd, the back-office arm of the New York Stock Exchange-listed Iron Mountain Inc., have seen the cancellation of the licences issued to them to operate in the Bangalore SEZ, according to documents reviewed by Mint. The move will possibly impact their operations.

A spokesperson for Geometric declined to comment on the issue. A Stratify executive confirmed the revocation of its licence to operate in the Bangalore SEZ.

The Stratify executive, who didn’t want to be named, claimed the company was merely consolidating its operations in one location—in the SEZ—and not trying to claim tax benefits for which it wasn’t eligible. That’s the same argument proffered by an executive at Msource (India) Pvt. Ltd, the back-office services arm of MphasiS Ltd, a subsidiary of Hewlett-Packard Co. The Msource executive also asked not to be identified.

While Stratify and Geometric had already moved their existing business to an SEZ, Msource and the Noida-based Steria India Ltd had sought the government’s approval to move their existing business units to SEZs in Bangalore and Noida, respectively.

Msource’s application was rejected on 18 October and Steria’s a day later. A spokesperson for Steria declined comment.

“The SEZ policy was formed to promote new business and investment," said an official of the unit approval committee. “Even if the companies do not claim tax exemption on the shifted entities, we can not allow them to operate as it is not permitted under the law," the official added, speaking on the condition of anonymity.

Earlier this year, these companies were allowed to operate in SEZs in anticipation of approval from the ministry of commerce. With no clarification coming, the licences of Stratify and Geometric had to be cancelled, the committee said in letters that have been seen by Mint.

Msource plans to argue its case before the ministry.

“It would have meant operational efficiencies to have all our work done out of a single business unit even if there was no tax benefit to be gained. However, our application was turned down on the premise that it was violative of the law," said the Msource executive. The company has hired tax advisory BMR Consultants and taken up the matter with the ministry of commerce.

All four units in question are registered under the Software Technologies Parks of India (STPI) scheme, under which they are eligible for 10-year tax holidays. The scheme was to end in 2009, but has been extended until March 2011.

The STPI scheme exempts companies from tax for 10 years. India’s SEZ policy exempts companies from tax for five years; in the next five years, companies need to pay only half the tax they would have otherwise paid; and in the five years after this, they can claim a 50% exemption on profits reinvested in the business.

“The fact that the tax holiday under the STPI scheme is expiring next year and only new business can be taken to SEZs is triggering such cases," said a consultant in the IT industry who did not want to be identified.

A second official at the unit approval committee, who was present at a meeting held in Noida on 19 October during which Steria’s proposal was turned down, admitted that several companies had approached it with a desire to do the same.

This official, who did not want to be identified, also claimed that several companies were doing this on the sly.

“Since most of the work of IT companies happens over virtual networks, it is very difficult to track if it’s being done out of (the) SEZ unit or the STPI unit, despite all the checks and balances in place," he said.

According to the latest figures compiled by the department of information technology, exports by STPI units declined by 0.89% to touch Rs205,504.88 crore in fiscal 2009-10 compared with 2008-09 while IT exports from SEZs grew by 78% to Rs27,464.99 crore.

“In a year when the industry was going through a tough phase and new business from clients was minuscule, what explains the 78% growth in exports from SEZs, apart from shifting of existing business, which is going unnoticed in most cases?" asked an official at the department who did not want to be identified.