Sustaining software growth

T. C. A. RAMANUJAM | Updated on: Apr 12, 2011

BL09_TIDEL | Photo Credit: N_SRIDHARAN

Scrapping of the STPI scheme will lead to the decline of the IT industry in the SME sector.

The Special Economic Zones Act, 2005 brought in independent provisions for tax incentives and exemptions for certain units and industries over a period of years.

Section 51 of the SEZ Act lays down that the provisions will have overriding effect notwithstanding anything contained in any other law for the time being in force to the contrary. Section 10AA of the Income-Tax Act, 1961 allows a 100 per cent deduction on profits derived by a unit-located in SEZ from the export of articles or things or services for the first five consecutive assessment years. For the next five years, exemption is conferred on 50 per cent.

Section 80-IAB allows a deduction of 100 per cent in respect of profits derived by an undertaking from the business of development of SEZ notified after April 1, 2005. Such exemption is made available for any 10 consecutive assessments out of 15 years beginning from the date of notification. Section 115JB(6) exempts profits of the SEZ unit from Minimum Alternate Tax. Exemption is also conferred from the levy of Dividend Distribution Tax.

There has been a raging debate about these incentives in the past three years. The Direct Tax Code proposed to omit exemption from MAT in respect of SEZ unit. Budget 2011 goes a step further. The levy of MAT and DDT on SEZs will now be advanced by one year from the introduction of DTC.

An off-shoot of the SEZ policy was the establishment of Software Technology Parks set up in accordance with the STP scheme notified by the government of India in the Ministry of Commerce and Industry (Notification SO 243 (E) dt.22.03.1994). The Amendment now made withdrawing exemption from MAT and DDT will definitely have adverse impact. . Our information technology industry was nurtured by the sops offered for Software Technology Park. Small and Medium Enterprises achieved a phenomenal growth. India's market share in the IT industry stood at 58 per cent of the world market.

This year's budget announces the end of all the advantages gained over the past decade and the Software Technology Parks scheme is practically scrapped.

Conflict of interest

There is apparent conflict of interests between the SEZ developers and those operating Small Medium Enterprises (SME) as Software Technology Park. The larger companies have been turning into real estate grabbers taking advantage of the SEZ scheme. SMEs have been neglected.

The scrapping of the STPI scheme in this year's budget will arrest the growth momentum of the IT Sector itself. China will overtake India as a super power in IT. Already the Philippines ranks as No.1 market shareholder in the BPO Sector. IT is to India what manufacturing is to Japan, South Korea and China. It is a pity that the Indian Government has not appreciated the yeoman service that the SMEs have rendered in promoting the IT industry and putting India on the world map as the super power. The absence of tax incentives will lead to the decline of the IT industry in the SME sector.

Promissory Estoppels

The Ministry of Commerce has voiced its opposition to these amendments. The Commerce Secretary has gone public voicing his protest. Some developers and units are even contemplating going to court on breach of Promise. The Doctrine of Promissory Estoppels has limited application in fiscal laws.

The Supreme Court has often taken the view that there can no estoppels against the legislature in exercise of its legislative function (Union of India vs. Godfrey Philips India Ltd., AIR 1986 SC 806). The power to exempt includes the power to modify or to withdraw the said exemption.

Because of the tax holiday for 10 years, there has been a tremendous growth of Software Technology Parks in the IT Sector. In Bangalore alone, the number of companies grew from 13 in 1991 to 5,000 today. Without much of Government expenditure, the STPIs were able to create a vibrant IT industry that employs more than a million professionals with an investment of Rs.3,00,000 crore.

It is for the Government to ponder: can we afford to fritter away the growth thus achieved by abrupt withdrawal of tax incentives?

(The author is a former Chief Commissioner of Income-Tax.)

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Published on April 09, 2011
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