The existing tax holiday under the STPI scheme is set to expire in 2009 which means all IT companies will have to pay corporate tax as well as indirect taxes like any other company. While the government is looking forward to a major revenue boost, the IT companies are setting up SEZs or trying to influence the government to extend the 2009 deadline. Which scheme serves better for IT companies ? Lets have a look.

Comparison

STPI scheme allows IT companies for a 10-year exemption from Corporate Income Tax   (on exports and on site services) while SEZ scheme provides a 15-year tax holiday on the same.   The SEZ tax holiday includes 100% exemption for the first 5 years , 50% for the next 5, and variable for another 5 years based on reinvestment in SEZs. The celebrations for STPI units are set to end in 2009 when the scheme expires while SEZ scheme promises tax benefits after the all crucial year. Both STPI and SEZ units enjoy tax sops like central excise (exemption on indigenous item procurement), customs duty (exemption on imports of capital equipment), central sales tax (exemption for SEZs / reimbursement for SPTI on inter-state sales and purchases) and service-tax (exemption for SEZs / reimbursement for SPTI on service exported out of India). Unlike STPI units, SEZ units are not charged VAT (value-added tax) / LST (local sales tax), besides other State-level taxes.

If a business unit shifts from an STPI to an SEZ, it may claim an increase in income-tax holiday. It will also get relieved from service-tax and central sales tax besides getting exempted from VAT, LST and other levies depending upon State legislation. On the other hand if a business unit shifts from SEZ to STPI, it would result in loss of exemption from VAT, LST and other local levies. Moreover it won’t be till a few months when the units start exporting to take advantage of the tax holiday.  

Nasscom has taken up the matter with the Government and stressed on the need to re-consider the issue of extension of tax concessions and take necessary action to set it right. They want more tax benefits to be given to small and medium businesses (SMBs) even if such benefits come from the SEZ scheme.  In the absence of which, they believe that SMBs would suffer more than the major players and the IT industry would not be able to keep pace with the competition from other countries and potential outsourcing businesses. As SEZs continues to remain in controversy and grab headlines, many SMBs and BPO firms have delayed their plans to move to SEZs. They are waiting for the government to come up with more tangible plan on the continuation of tax holidays for the existing STPI scheme before they starting investing money in new locations.

Big companies have already started setting up their own SEZs but it’s not possible for SMBs to do that resource-wise. To set up an IT park under the SEZ scheme the minimum land requirement is about 25 acres. Most SEZ developers don’t sell anything below 50,000 sq feet while SMBs require around much less, somewhere around 5,000 sq ft. It’s not practicable for these companies to make such a huge investment.

SMBs cannot afford to shift to SEZs, which are remotely located because of the high relocation expenditure. And the saturation of IT parks in cities is not helping them either. If at all they move to SEZs, SMBs will find it difficult to draw the workforce to such remote locations. There is already shortage of workforce in the industry and everyone wants to go for the highest package deal where SMBs lose out to big companies.

Security is also a concern as the distance to the office will be long and will require traveling to the outskirts of the city. Hence it is unsafe primarily for women employees. Moreover work in such units, which mostly handles UK and US clients, starts in the evening and continue till late nights. It’s difficult for SMBs to provide pick-up n drop facility to their employees.

asingh@principalconsulting.net