The Hindu Business Line : IT industry sees valid case for tax holidays

Chennai, July 7 The argument that the software industry should lose its pampered status is getting louder, even as voices from within the industry say that smaller companies, and not bigger ones, should continue to get tax holidays through the STPI scheme.

Tax holidays granted to units under the Software Technology Parks of India (STPI) and special economic zone (SEZ) policies have cost the Government nearly Rs 13,000 crore in 2008-09, a rise of 10.8 per cent over Rs 11,700 crore in the previous year. (This does not include EOUs which include software units – See table.)

However, the IT software services and BPO industry feels this status is mutually beneficial to itself and the government.

People costs

The industry’s defence in this argument is its employee base. In excess of 2 million, highly paid workers, the base contributes to the Government’s kitty through individual taxes that employees pay.

Says Mr Rostow Ravanan, Chief Financial Officer, MindTree Ltd, “We are a $50-billion industry, of which 60 per cent is people costs.” That makes employee costs about $30 billion or Rs 1.5 lakh crore, approximately.

He argues that the tax paid out of that amount would be substantial for the Government. (Assuming 65 per cent of total employees are in India and pay on an average tax at the rate of of 20 per cent, personal tax collections here would amount to roughly Rs 19,500 crore.)

Also, every direct job created in this sector leads to about 5.2 indirect jobs. “Of these, at least three would be white-collar ones; such as a doctor, entertainer, teacher, or hospital staff,” he says.

The current Budget proposal to extend the STPI scheme for a year has been timely for the industry. “For the first time in 20-odd years, the industry could see a sequential slump in revenues this year. About 35-40 per cent of our people are not billed right now, but are still employed.” In other words, he says, if government support had been withdrawn, it could have led to unemployment.

Larger good

The one-year extension of the tax holiday may actually do a larger good, says Mr Sujit Sircar, Chief Financial Officer, iGATE Corporation. According to him, the Finance Minister had to consider the 6.8 per cent Budget deficit; create domestic demand; and take the economy out of a slowdown.

“An export boost would mean that the industry could reduce cost and create demand in its markets. That would mean more employment, more personal taxes and more consumer-spending.”

“The Finance Minister has also managed his cash flows well with the MAT.”

The Minimum Alternative Tax now makes all companies, whether they enjoy tax holidays or not, pay taxes of at least 15 per cent (earlier 10 per cent) of their book profits. They can later set it off against taxes they may have to pay in the future.

The National Association of Software and Services Companies (Nasscom), the apex body for the industry, had done a study of tax rates for about 70 companies listed on the stock exchanges. Says Mr Som Mittal, President, Nasscom, “The effective tax rate for these companies is between 12 and 15 per cent.”

He also cited that almost 40 per cent of the industry’s revenue comes from captive arms of multinational companies. “There, the profit itself is lower (than industry standard). That is a different issue altogether. So, taxes paid by the industry are not as low as thought out to be.”

Small players need umbrella

According to Mr S. Mahalingam, CFO and Executive Director, Tata Consultancy Services, “Most of our expansion has been in SEZs and not STPIs, in the last three years.”

He feels that any STPI expansion that happened recently would have been by smaller players.

“The significant amount of Rs 11,734 crore (revenue foregone through STPIs alone for 08-09) shows a lot of small players are benefiting.” This, he feels, validates the industry’s demand for tax holidays for small players.