Chitti Pantulu, Rabin Ghosh, Amit Tripathi & Praveena Sharma

Hyderabad/Mumbai: The information technology industry gave its thumbs up to finance minister P Chidambaram’s move to extend by 12 more months the 17-year old Software Technology Parks of India (STPI) Scheme up to March 31, 2010.

Kicked off in 1991 the scheme is a major component of India’s success as a global outsourcing hub for almost the past two decades.

Today it makes some 8,000-odd IT units more competitive by providing direct tax exemption under Sections 10A and 10B of the Income Tax Act, 1961, scheduled. It was earlier to expire on March 31, 2009.

Quite understandably, the industry has welcomed the extension.

“It is a big relief in the face of the current global situation,” said Wipro’s CFO Suresh Senapathy.

“The extension of the sunset clause is fair and brings us on a par with export-oriented units, apart from helping us prepare better for its ultimate exit,” he said.

And reading between the lines that is precisely what could become the bone of contention once the celebrations die down and better sense dawns.

While some contend even the government needs time to understand the industry’s concern and the market situation, the one-year extension could inadvertently promote an uneven playing field giving the bigger players the breather they have been looking for.

They large companies are preparing to move to their exclusive special economic zones (SEZs) to derive the benefits of 100% tax holiday for the first five years, 50% for next five years thereafter and 50% of the ploughed-back profits for the last five years. But many of them are not ready yet and will take at least 1-2 years more.

In fact, while the entire industry had been worried anticipating a tax spike in financial year 2010 of up to 18-22% from the current 12-15%, that the STPI sunset clause is now timed to the transition to the new SEZ regime, will definitely be a welcome development for the big companies.

However, this is not something smaller players with little wherewithal can hope for.

According to some estimates, IT companies will be able to make 100 bps higher margins by executing work out of SEZs at any point in India.

Therefore, the extension of the STPI scheme by one more year will not mean firms will slow down setting up SEZ capacities since that is the way to go, said an analyst with a foreign brokerage, who did not wish to be named due to compliance reasons.

“We have upgraded the estimated FY10 earnings (EPS) for the frontline IT stocks by 9 -10%. TCS’ FY10 earnings has been upped to Rs 71 from Rs 65, and similarly for Infosys it is Rs 115 from Rs 107,” he said.

“Otherwise we don’t expect the extension of the sunset clause to have any long term impact on IT firms expanding from STPI to SEZs.What it only means is that it gives them some additional time to invest in SEZs,” he said.

Mohandas Pai, head of HR, Infosys, said since the industry comprises big, small and captive IT organisations the tax benefits need to be categorised accordingly.“We are waiting for more clarity,” Pai said.

Having said that analysts contend a high revenue growth is now critical for tax planning for IT companies as they shift business mix faster into the SEZ with all incremental work beginning to be executed from them rather than the STPIs.

But given the current economic scenario, and the lag in developing these hi-tech enclaves, there are challenges to making this happen quickly.

The industry is currently coming to grips, and perhaps will continue to do so for the next few years,with the vagaries of a fluctuating currency, a sluggish US market and the fast depleting advantage of cost arbitrage and it may not be in a position to weather a higher tax burden.

According to Sailesh Shah, head, corporate strategy, at Satyam Computer, India’s fourthlargest IT services company, the tax differential would be around 2.5% for most companies but the effective impact would be around 100 basis points.

However, the issue goes beyond Sections 10A and 10B as the country will have to make a choice between higher tax or the creation of 100 million new jobs which will be lost with the demise of the STPI scheme, the implications of which will be far greater than just higher tax accruals, he stressed.

“The simple philosophy is that we have no choice but to have the scheme and the lobbying continues for its continuation,” he said adding the industry would prefer to keep it going till 2020.

Moreover in a scenario where costs are going up and India’s cost arbitrage advantage getting challenged by smaller countries like Philippines, there is no alternative to the STPI scheme, he held.

Suveer Chainani, analyst with institutional brokerage Macquarie Research, said, “The extension has already had a positive impact with share prices of technology stocks rising between 6-8% instantly. Going forward the move will be beneficial for the small and mid caps IT shares,” he said.

Source : DNA