Icrier wants STP, EOU sops to stay

The finance ministry study suggests tax exemptions should continue beyond March 31, 2009.

A study commissioned by the finance ministry and carried out by economic thinktank Icrier has recommended that income tax exemptions to export oriented units (EoU) and under the Software Technology Parks of India (STPI) scheme should continue beyond the phaseout date of March 31, 2009.

The report, "Economy-wide impact of export promotion schemes," analyses the revenue loss and the beneficial aspects of special economic zones (SEZs), EoUs and software technology parks (STPs).

The study concludes that the benefits of EoUs and STPs are substantially more than the tax losses. According to Icrier consultant Aradhana Aggarwal, who conducted the study, EOUs and STPs are similar to SEZs and hence the tax benefits for them should continue.

"Theoretically, there is no difference between schemes for SEZs, EOUs and STPs. All of them have the same objectives, governing laws and administrative set-ups. Why should the tax benefits be withdrawn?" she said.

According to the Icrier study, which Aggarwal said was commissioned over a three-year period, the revenue loss incurred by the government due to the tax exemptions would be around Rs 8,186 crore, while foreign exchange inflows would be to the tune of Rs 3,53,000 crore.

The income from the STP units in the period would be Rs 10,4529 crore. According to figures quoted in the study, IT exports from over 6,000 STPI units constituted 97.8 per cent of the total infotech exports of $ 23 billion in 2005-06.

"NASSCOM has been pushing for a level-playing field and the obvious way to achieve this is continuation of the STPI scheme, which has worked very well in the past for our industry, which is primarily knowledge- and service-based and does not need physical and geographical restrictions to prosper,'' said NASSCOM President Kiran Karnik.

"The proposed (tax exemption) withdrawal will either reduce the growth rate or divert IT investments to SEZs. Both these scenarios are welfare reducing," says the report of the study. Also, more than 4,000 small and medium enterprises (SMEs), which contribute 41 per cent to STP exports, will not be able to migrate to infotech SEZs, unlike big infotech companies. This will adversely affect their performance.

According to Karnik, after the income tax benefits are withdrawn, small units in STPs will have no choice but to rent space from various SEZ developers at exorbitant rates.

Taking a similar stance on EoUs, the study projects that between 2006-07 and 2009-2010, the revenue loss to the government will be Rs 5,468 crore. "These losses are notional. If there is any diversion of investment from EoUs to SEZs, the government will incur losses any way," said the report.

According to LB Singhal, director general of the Export Promotion Council for EoUs and SEZs, the EoU policy will die a natural death if the sunset clause on removal of tax exemptions on EoUs is implemented.

"EoUs have promoted manufacturing activity as trading is not permitted in these units. In the last one decade, the average growth rate of EoUs has been over 30 per cent. This scheme needs to be nurtured further because if the sunset clause is not removed, no exporter will operate under Customs' regulations," he said.