Centre may retain tax sop only for BPOs

Proposal to be put up for approval of the PM-headed National Development Council

The central government is likely to extend the Software Technology Parks of India (STPI) scheme beyond 2009 only to Indian information technology-enabled services/business process outsourcing (ITeS/BPO) firms.

A proposal to this effect has been included in the 11th Five-Year Plan document, which will be put up for the approval of the National Development Council, headed by the prime minister, on December 19.

The Plan document, inter alia, states: "With the weakening of the US dollar against the Indian rupee, the ITeS/BPO industry has come under pressure and it needs to be nurtured. Necessary policy interventions need to be put in place on a fast-track mode. Extending the 10A and 10B benefits for BPO industries beyond 2009 could be one such encouragement."

Otherwise, this segment of the sector "" which is a huge employment-generator "" may move to other countries which are more cost-effective, the document cautions.

Under the STPI scheme, 100 per cent tax deductions on profits under Section 10A and 10B are available only up to March 31, 2009. In the absence of such deductions beyond 2008-09, the companies will have to pay a normal tax of 33.99 per cent.

Reacting to the proposal, Nasscom (National Association of Software and Services Companies) President Kiran Karnik said: "We are very excited about the development and are keen for a formal announcement."

"The STPI scheme is most important for smaller companies and BPOs, both of which have been most affected by the appreciating rupee. These companies also cannot afford to shift to special economic zones (SEZs)," said Raman Roy, chairman and managing director, Quatrro BPO Solutions.

The Centre is simultaneously planning to request the IT industry to shift from dollar to rupee-denominated contracts to benefit from the rising rupee.

Karnik noted that "for every 1 per cent that the rupee gained against the US dollar, on an average, the companies witnessed an impact of 30-40 basis points on the profits".

The rupee has appreciated 11 per cent since January 2007, the fastest among major currencies, and is hovering around Rs 39.40 per dollar.

Meanwhile, the Finance Bill, 2007, has proposed levying of Minimum Alternate Tax (MAT) on companies without eliminating the profits and gains eligible for deduction under Section 10A and Section 10B. MAT will be levied at 11.33 per cent on book profits computed in accordance withSection 115JA of the Income-Tax Act, 1961.

In view of the above, the Nasscom has suggested that the levy of MAT on Section 10A and 10B profits be deferred unless a decision to extend the tax holiday beyond March 31, 2009, is taken simultaneously.

India has an estimated share of 65 per cent of global offshore IT and 46 per cent of global BPO business. The size of Indian IT and ITES-BPO industry stood at $39.6 billion in 2006-07. The addressable market for offshore BPO globally stands at $150 billion, leaving enough headroom for further growth, say analysts.