The concern is writ large on the face of Srikanth R, president (finance) and chief financial officer of a mid-sized Chennai-based mid-sized information technology (IT) services firm, Polaris Software.
While he is hoping the government will extend the Software Technology Parks of India (STPI) scheme by a year or two beyond 2011, he’s not taking any chances. Polaris gets over 90 per cent of its revenue from exports. Till financial year 2009-10, the company did not actively think about a strategy to buy space in a special economic zone (SEZ). Srikanth, however, admits he may not have an option now.
“Till a few years back, we did not look at SEZs as an option to grow. But, if the government does not extend the STPI Act beyond March 31, 2011, we will have to expand into an SEZ. We are not too bullish about SEZs, as only new businesses can be delivered from these units. But, we might look at taking some space in a Pune SEZ,” says Srikanth.
| LOGGING OFF |
| * SEZs appear to be the primary option |
| * But only new businesses will benefit |
| * If STPI benefits go, tax incidence increases by almost 7-10 percentage points for small, mid-sized IT firms |
| * Large IT firms with businesses in SEZs may not be hit as hard |
| * Real-estate players see increased business from IT firms, but not frenzied activity |
Polaris is not the only company to have resigned itself to the inevitability of paying higher tax and moving into SEZs after 2011. Many small and mid-size IT firms continue to hope the government will extend the STPI scheme by a year or two, but are preparing for the worst.
Their fear is not unfounded. Exports by units registered under the STPI scheme are estimated to have touched about Rs 2,02,580 crore during 2008-09 — a 12.4 per cent growth over the previous year.
One such beneficiary, Hanuman Tripathi, CEO and managing director of Infrasoft Technologies, gets close to 80 per cent of his company’s revenue from STPI units. He has acquired new infrastructure in a SEZ but remains concerned that “while this will protect our new exports business, we still have issues on cost-efficiency with our current exports business, as the law does not permit you to take your old business into SEZs to claim tax benefits”.
Tax experts, brokerage houses and industry observers, on their part, believe sops such as the STPI are not in line with the Direct Tax Code and, hence, will have to go. But, if the STPI Act is done away with in 2011, experts believe the effective tax rate for IT SMBs would increase to 22-28 per cent, effectively hurting their margins and even putting some of them out of business. Currently, the tax rate hovers 15-18 per cent.
“For mid-caps, especially those who are not operating out of SEZs, the removal of STPI will mean huge a tax liability. Instead of minimum alternate tax (MAT), firms will have to pay corporate tax of 30 per cent, subject to available MAT credit,” explains Pranay Bhatia, partner, Economic Laws Practice.
Moving business to SEZs, hence, appears to be the primary option. The Indian IT-ITeS (IT-enabled services) sector is currently a big buyer of property in SEZs. Of the 574 SEZs, the IT-ITeS sector accounts for almost 62 per cent. And large IT firms derive around 20 per cent of their revenue from SEZs. As much as Rs 17,697 crore of IT exports are estimated to have been logged by SEZ units in FY09, compared with Rs 5,618 crore a year ago.
The number is set to increase. Abhishek Kiran Gupta, head-real estate intelligence service, Jones Lang LaSalle Meghraj, bears out the fact that there has been a general uptake in the demand for SEZs. “We have seen interest by IT firms in the SEZ that are either ready or near completion. But, this has not meant that there is a frenzied activity among the developers to start developing new SEZs,” he qualifies.
Land, however, comes at a cost and increases the capital expenditure (capex) of firms. Hence, it’s primarily big IT firms rather than small and mid-sized IT businesses (SMBs) ones that can buy properties in SEZs without feeling the pinch.
Many of the large firms already do a sizeable portion of their business out of SEZs and hence may not feel the impact even if the STPI Act were not to be extended. For instance, Infosys Technologies currently pays tax of around 22 per cent. For FY12, this may go up to 24-25 per cent if the STPI Act is not extended. Tata Consultancy Services (TCS) and Wipro currently pay tax in the range of 15-16 per cent, and this is expected to jump to 23 and 21 per cent, respectively. These companies, however, also have large cash reserves to buy properties in SEZs.
For players like Ganesh Natarajan (also former Nasscom chairman) of Zensar Technologies, which derives 37 per cent of its revenue from STPIs, moving business into an SEZ would mean an additional capex of Rs 4 crore for FY11.
In the case of Hexaware, too, which already has two SEZs that account for 25-30 per cent of its overall revenue, it might have to start an SEZ in Mumbai if the STPI scheme is not extended. “We would have to incur capex for an additional SEZ centre in Mumbai. Assuming we are able to rent a warm-shell space in an SEZ, we might have to incur capex on the interiors, etc, amounting to at least 12-15 crore,” says Prateek Aggarwal, chief financial officer, Hexaware Technologies.
Unfazed, industry body Nasscom believes it may just be able to exert enough pressure on the government for a better deal. “If you say that the STPI might not get extended as the Direct Tax Code will replace sops, then logically what’s the rationale for an SEZ? Like STPI, SEZs too are profit-based schemes. Nasscom and the recommendations suggested by the task force urge the government to use the STPI scheme to catalyse growth momentum in the Tier-II and -III cities, as well as benefit the small and medium businesses,” asserts Nasscom Vice-President Raju Bhatnagar.
Software body Nasscom estimates the export revenues for the Indian IT-BPO industry to record a growth of 5.5 per cent, to reach $49.7 billion in FY 09-10. The Indian IT-BPO sector accounted for over 25 per cent of total exports from India, 5.9 per cent of the country’s GDP and 10.5 per cent to the services sector in FY09. Nasscom hopes that sops like the STPI Act will stay, especially if IT SMBs have to survive.
