Small versus large is not the issue Of the 4,000 companies in the IT sector, only about 50 are large ones that contribute to three-quarters of the sector’s revenues. The effective tax rate of these companies is 16-18% against the national average effective tax rate of 19-20%. This is despite incentives such as the income-tax deduction on export profits for companies operating in software technology parks (STP) or the tax holiday in special economic zones (SEZs).
The effective rate for large companies, that pay minimum alternate tax, will rise to 21-24% once the STPI scheme ends on March 31, 2011. While large companies will be marginally impacted if tax incentives go, small companies, many of whom are starting up, will be wiped out. The small units can’t set up operations in SEZs due to stipulation on the minimum size and location. While SEZs can be set up on the outskirts of cities, STPIs can be located anywhere. In fact, the STPI benefits should be at par with tax benefits for SEZs. The economic multiplier will be far higher than the revenue loss to the government as the IT sector earns $50 billion and directly employs 2.3 million.
Several MNCs have set up operations in the country to improve their competitiveness. We must look at India’s position in a global environment. China and other countries are giving tax sops to woo foreign investment, specially in the IT sector. The government must make it easy for IT companies to do business in India. Today, besides training, IT companies incur huge expenses to make up for our inadequate infrastructure. The Philippines, Vietnam, Egypt, Sri Lanka and Mauritius do not have such disadvantages. Since these cannot be defrayed, India must support the sector that has the potential to earn $225 billion and employ one crore by 2020. Creating a differential approach between small and large companies for tax benefits will not resolve the challenges faced by the sector. There are many issues, including defining small and large units as well as administering a tax incentive linked to a threshold. (As told to ET) Som Mittal
Retain benefit for the entire sector As a matter of macro policy, it is best not to create economic distortions based on whether an enterprise is small or large. Back in the 1970s and 1980s, incentives for the small-scale sector (SSI) were linked to parameters including a cap on the number of employees. The government imposed higher sales tax and excise duties if the cap was breached, effectively discouraging expansion by SSIs. It would be imprudent to commit the same mistake again. Developing countries need to efficiently use their limited capital, which is possible only with an unfettered private enterprise.
Today, Indian IT companies are competing with their peers in the Philippines and China. Going forward, they will also compete with companies in the US and Europe, with these countries framing policies to discourage offshoring. The recent EU proposal to levy 15% value-added tax (VAT) on services delivered from outside EU is a case in point. Both Philippines and China offer tax sops to their technology sectors. For every project that Indian companies bid for, they have to show an edge not only in pricing and intellectual capital, but also available infrastructure and sustainability. India’s IT services sector has flourished largely due to the hands-off approach of the government and tax incentives. However, the unavailability of land to set up large-scale operations prevents our companies from reaping the benefits of economies of scale.
Managing operations in multiple locations diverts management time and attention. The imminent end of the tax holiday for the STPI units and the uncertainty created by the draft direct taxes code over the availability of tax holiday to units in SEZs have compounded their worries. The SEZs, meant to encourage creation of new infrastructure, are facing hurdles due to rising real estate prices and tepid response from units after the global economic meltdown. Therefore, learning lessons from some of our competing economies, it would be good if the government takes a pragmatic view and continues the incentive regime for the entire IT sector. Shefali Goradia
Partner, BMR Advisors
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