Ministry pushes for tax sops to IT companies

In what may bring some cheer to infotech companies, the Ministry of Communications and Information Technology has begun the process of seeking Union Cabinet approval for extending tax benefits for the sector beyond April 2009.

The benefits are available to export oriented units and the Software Technology Parks of India under section 10A/10B of the Income Tax Act and expire on March 31, 2009. If allowed to lapse, the tax liability of infotech firms will also increase substantially.

By one estimate, if the 121 listed infotech companies were to pay tax at the full rate of 33.66 per cent in 2006-07, their tax liability would have gone up by almost Rs 3,720 crore.

A Department of Information Technology official today told Business Standard that a note for the Cabinet's consideration was "under preparation".

However, the finance ministry is not in favour of extending the tax benefits so as to stem tax revenue foregone. In 2006-07, the revenue foregone on account of section 10A/10AA/10B/10BA was estimated at Rs 12,524 crore, an increase of 44.65 per cent over Rs 8,658 crore foregone on this account during 2004-05.

The Department of Information Technology official added that not extending the tax breaks could result in big infotech companies shifting base to special economic zones that offer major tax breaks. However, smaller companies would suffer as they would not be able to sustain the substantial relocation costs and other related issues.

While the 4,200 small and medium enterprises registered with Software Technology Park of India are contributing 41 per cent of its total exports, these companies are already facing margin pressures on account of increasing salaries and decreasing average billing rates, according to economic consultancy ICRIER.

"How many SEZs will be ready by 2009? Why should the infotech industry suffer? The benefits from the tax breaks are far more important than the revenue loss," added the Department of Information Technology official.

Interestingly, ICRIER, that had been commissioned by the finance ministry to conduct a study on the subject, also concluded that the tax exemptions should be extended beyond April 2009.

Taking a similar stance on export oriented units, the ICRIER study projects that between 2006-07 and 2009-2010, the revenue loss to the government would stand at Rs 5,468 crore.

"These losses are notional. If there is any diversion of investment from export oriented units to SEZs, the government will incur losses any way," says the study.