Extension of sops will only treat symptoms
Kala S Sridhar,Fellow,NIPFP
The commerce ministry has proposed that the budget for 2008-09 should extend tax concessions to Software and Technology Parks of India (STPI), beyond April 2009, their scheduled sunset, after 15 years of exemption.
There is no doubt that India’s software industry has created more than a million skilled jobs and is the greatest generator of export revenues, accounting for nearly one-fifth of the total. One of the objectives of STPIs is also to promote smaller firms, which assumes relevance in the aftermath of the appreciating rupee, given the dependence of smaller firms on the US market.
However, continuing tax incentives does not make sense because of the following:
Research shows that, for maximising the effects of tax incentives, they should be offered for a limited time period. If they continue for periods longer than this optimum, they likely degenerate into becoming a permanent feature of the tax system.
Second, continued tax exemptions to STPIs, due to their revenue implications, would make difficult meeting of the targets set by the Fiscal Responsibility and Budget Management Act, thwarting prudent fiscal policy. Third, such sops are effectively subsidies to exporters, and are challenged in international fora such as the WTO. Finally, many of the Indian software sector’s problems span beyond tax exemptions.
The sector faces shortages of workforce with required skills and high attrition. It faces rising costs of real estate, with the space requirements slated to be an additional 20 million square feet of space each year, much greater than the commercial real estate space that is developed currently, based on the additional employment to be generated in the sector over the coming years.
Obviously, the solution to all these problems does not lie in tax exemptions. Efforts have to be made by the industry to enlarge the pool of workforce with the required skills, identify alternative low-cost locations to contain the costs of real estate, and facilitate the government’s job in stepping up relevant IT infrastructure and public services to improve their own productivity. To continue tax exemptions is tantamount to treating the symptoms without treating the underlying cause.
(Views are personal)
Ending tax exemption will hurt IT growth
Surjeet Singh, Chief Financial Officer, Patni
The STPI scheme that exempts software companies from paying taxes on their export profits should be continued beyond March 2009, as it has played a vital role in propelling the tremendous growth rate witnessed by the IT industry over the last decade.
IT accounts for 5.4% of India’s GDP, and its export revenues alone are expected to touch $60 billion by 2010. However, doing away with the tax exemption at this crucial juncture would hurt the IT sectors’ long-term growth prospects.
At the moment, the IT industry in India is beset by mounting pressures from various quarters. Issues like rising wage costs and rupee appreciation against the dollar in the past few months have impacted the bottom lines of most IT firms.
While the Indian IT industry is poised to ride the next growth wave, to successfully tap this potential and continue to grow at 30% growth rate, it needs to invest in creating new business models centred around end-to-end capabilities, business solutions, platform BPO, which will require continued investments, strategic M&As, and integration of global workforce in order to move up the IT value chain. Similarly, SMEs also need to carve niches for themselves. However, to truly achieve a level playing field and tackle the above mentioned pressures the industry needs more time to adjust.
The IT industry is a major contributor to India’s economic growth and has mainly progressed because of the support available through the STPI scheme. Moving to a new location or renting space in SEZs is not a viable option, as it will add to the operating costs of companies currently benefiting from the scheme. Additionally, it would be difficult for most companies, and especially the SMEs, to fulfil the various criteria required by the government, including acquiring a minimum mass of land to qualify for setting up an SEZ.
Only the STPI scheme can offer the industry the support it requires and ensure that the IT sector grows at a robust pace. Hence, in order to maintain the sheen of the IT industry the government should extend the scheme by a few more years to reduce the scope for any further polarisation between the players in this sector.
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