The flourishing Indian IT industry has nose-dived due to the strong rupee. Even the biggest players of the industry are feeling the heat of the rising rupee. Indian IT industry is largely dependent on the overseas market which makes it vulnerable to the fluctuating exchange rates.
The story of the IT sector is however not as bad as some of the other sectors like apparel export. The major reason behind it is the market share India has in this sector globally, the cost effective resources and more importantly high margins. Although the IT index has not been able to keep its pace with the bull run but the industry is sustaining the exchange rate fluctuations. But industry experts are of the view that rupee appreciation is leading to a major stagnation in the industry and is very harmful for the small players.
The Department of Information Technology is pushing for a two-year extension of tax sops in the Software Technology Parks of India (STPI) scheme under Section 10(A) and Section 10(B) of the Income-Tax Act. Under the STPI scheme, 100 per cent tax deduction on profits under Section 10A and Section 10B is available only up to March 31, 2009. The companies will have to pay tax at an estimated rate of 33.99 per cent in the absence of these deductions.
Communications and Information Technology Minister A Raja had earlier written to Finance Minister P Chidambaram seeking a 10-year extension of the scheme that exempts export revenues of software companies from tax.
IT industry body Nasscom, in its pre-Budget memorandum, has appealed to the Finance Ministry to extend this tax exemption. The memorandum pointed out that the STPI scheme has been a big success and a major contributor to the growth of the Indian economy. It said that the withdrawal of the exemptions would increase the industry’s cost substantially and put the Indian IT companies at a disadvantage to its global peers.
The Finance Ministry has however not taken any final decision and is looking at the tax revenue forgone due to the extension of the tax benefits. In 2006-07, the revenue forgone on account of sections 0A/10AA/10B/10BA was estimated at Rs 12,524 crores, an increase of 44.65 per cent over the Rs. 8,658 crores forgone on this account during 2004-05.
Interestingly, an ICRIER (Indian Council of Research on International Economic Relations) study commissioned by the Finance Ministry has recommended that the income tax exemptions to export-oriented units (EoU) and under the STPI scheme should continue beyond the phaseout date of March 31, 2009.
According to the study, the revenue loss incurred by the government due to the exemptions would be around Rs. 8,186 crores, while foreign exchange inflows would be to the tune of Rs. 3,53,000 crores. IT exports from over 6,000 STPI units constituted 97.8 per cent of the total InfoTech exports of $23 billion in 2005-06.
I personally wish that there should be some incentives for Internet-based education and awareness oriented websites. There is a huge amount of online and offline investment in developing such a platform. FM, please do take special note of this.