C Chitti Pantulu

Hyderabad: While it is a foregone conclusion that a new government at the Centre will take a call on extending the Software Technology Parks of India (STPI) scheme beyond the 12 months reprieve given by finance minister P Chidambaram, the National Association of Software and Services Companies (Nasscom) is proposing a selective extension of the scheme to smaller towns.

Nasscom president Som Mittal told DNA Money, “The extension of the STPI scheme has raised the spirits of the industry and given us time to think through the alternatives.”

Kicked off in 1991, the STPI scheme has been a major contributor to India’s success as a global outsourcing hub over the past two decades. Today, it makes some 8,000 IT units more competitive by providing direct tax exemption under sections 10A and 10B of the Income Tax Act, 1961.

The scheme was to expire on March 31, 2009, before the finance minister late last month extended it up to March 31, 2010. According to Mittal, the current special economic zone (SEZ) scheme is encouraging companies to go to the larger cities.

However, the policy is not particularly tailored to the small and medium sized companies.

The large companies are preparing to move to their exclusive SEZs to derive the benefits of 100% tax holiday for the first five years, 50% for the next five years and 50% of the ploughed-back profits for the last five years. According to some estimates, IT companies will be able to make at least 100 bps higher margins by executing work out of SEZs anywhere in India.

These players will be able to weather the storm, though many of them are not ready yet and will take at least one-two years more.

It is the small and medium companies without the wherewithal to set up their own SEZs that will suffer.

Extending the STPI scheme to smaller towns could help here. Significantly, earlier last week, Nasscom released a joint study with AT Kearney, surveying the top-50 next destinations for ITBPO operations in the country, apart from the existing top seven metros.

The report sketches the opportunities available in these cities for attracting investments from the sector and a roadmap to achieve uniform economic development in the country.

According to an analysis by Citigroup analysts Surendra Goyal and Hitesh Shah, while Tier II players will likely benefit more from the STPI extension, among the Tier I companies, Satyam and HCL are set to benefit the most.

Ironically, Satyam and HCL are the least prepared for the SEZ strategy and are expecting up to 15-20% of their revenues from new SEZs in FY09.

Had the STPI scheme not been extended, they were looking at an expected tax rate (ETR) of over 22%. With the extension, their ETRs will be in the midteens.

Wipro and Infosys benefit much less by virtue of being way ahead of the others in SEZ readiness as also in having the highest number of STPI units that complete 10 years in FY10. The ETR for TCS, for instance, will fall by 6% in FY09. Given the global economic scenario, it is the small player who needs the assistance.

“We will work out various options for this,” Mittal asserted.

The apex industry expects the industry to grow by 22-24% this year, compared with the earlier expectation of a 28% growth. But, the overall target of $60 billion remains unchanged. “Even if we grow 21-22%, we should be able to achieve it,” said Mittal.

Source : DNA