IT companies queue up for SEZ licence to extend tax holiday

IT companies queue up for SEZ licence to extend tax holiday

Faced with the prospect of losing out on significant tax incentives and exemptions after 2009, India’s software and back-office companies are scrambling to set up special economic zones (SEZs) that will enjoy similar incentives for 15 years after their inception, and executives in information technology (IT) companies and experts are divided on the merits of this trend.

According to data provided by the government-run Exports Promotion Council for export-oriented units (EOUs) and SEZs, of the 366 SEZs that have been formally approved, 257 are for IT and back offices; and of the total 146 that have been notified, 85 are IT SEZs. “There has been an increase in the applications for IT SEZs in the last year. The largest number of SEZ applications has come from the software sector," said L.B. Singhal, director general of the Exports Promotion Council for EOUs and SEZ.

India’s IT and back office firms exported $31.4 billion (Rs1.23 trillion) of services in the year to March 2007; the business is growing at around 40% a year. Most of these firms enjoy a tax holiday (they effectively pay no tax) because of the Software Technology Parks of India (STPI) scheme that expires in 2009. The government has shown no indication of extending this scheme.

The rush by IT and back-office companies could come at a high cost—to innovate, said one company executive. The smaller companies wanting to put up SEZs do not operate at the same scale as big companies because of which their own performance, and consequently, innovation, could be the casualty, said T.V.Mohandas Pai, a director on the board of Infosys Technologies Ltd. Pai added that most companies were taking the SEZ route because of the imminent end of the STPI scheme.

Infosys Technologies has three notified SEZs; Tata Consultancy Services, India’s largest software company, has one; Wipro Ltd has five; Satyam Computer Services Ltd, three; and HCL Technologies Ltd, two.

Pai said that the government should consider extending the STPI scheme because, contrary to popular perception, IT companies did contribute to tax revenues.

“Of the $42 billion software exports (projected in the year to March 2008), $21 billion will be offshore and $21 billion will be onsite. Of the $21 billion, 55% ($12 billion) is paid as salaries and taking an average 20% as individual tax, around $2 billion taxes are coming from IT employees. This is fantastic. No other export industry creates so many jobs and pays such taxes to the government," he added.

However, SEZs do seem a viable alternative to software parks should the government not extend the STPI scheme. Companies located in such zones pay no income tax for the first five years, and for the next five, they pay a fraction of the tax they would have otherwise had to pay. According to Singhal, SEZs are actually a better alternative to software technology parks because, unlike the latter, they also create other infrastructure, including residences for workers.

“This will reduce the strain on infrastructure in the metros," he said. Much of Bangalore’s infrastructural problems have been attributed to the growth of the IT and back-office industries in the city.

As for the relative costs involved, it is too early to say SEZs are more expensive than software technology parks, said K.V. Madhan, associate director at audit and consulting firm Ernst & Young.

“Building SEZs does not happen overnight. It takes two-three years. When we get to the implementation stage in the next year, only then can we know the benefits of the policy," he added.