ITeS sector wants extension of STP scheme

Industry is recommending that the tax exemption for STPs continue for another 10 years so that companies can continue availing of benefits.

The global turmoil has taken its toll on all the sectors with the most hit being the software and banking sectors.

The software sector, which is most dependent on exports for its revenues and that too more on North America for its revenues, has been marred by volume growth worries with US economy slowing down. Europe, which was believed to be the replacement for North America has also seen a slowdown.

The BFS collapse has meant dip in spent of the largest revenue contributor in terms of industry vertical. Last but not the least the volatility of the dollar against other currencies has made matters worst for the sector.

OECD has said that the coming period would be tough for IT Industry and NASSCOM has also shown its concern about the growth of the India IT industry and has lowered its guidance and now expects $60 -- 62 billion revenues by 2011.

However, recently, there have been some signs of recovery with most managements and clients believing that the bottom has been reached.

Industry expectations

Industry is recommending that the tax exemption for STPs continue for another 10 years so that companies can continue availing of benefits and have the time to adjust to the SEZ framework, which will take the next 2 or 3 years to really get operational.

Also the extension will help mitigate impact of the recession and protectionist measures being adopted globally.

This is particularly important for Small/Medium enterprises to facilitate their continued growth, provide parity with incentives under the SEZ scheme and encourage industry to move into Tier 2/3 cities.

The Interim budget had indicated amendment in Section 10AA of Income Tax Act, 1961 regarding the anomaly in calculation of SEZ export profits. Currently, SEZ export profits are required to be computed with reference to the total turnover of the assessee, creating a discriminatory structure. The industry recommends that the necessary changes in the Act need to be implemented.

The industry recommends removal of multiplicity and inequity of taxes; it has requested the government to resolve duplicity of indirect taxes for packaged software; provide clarity in policies for service tax refunds, develop uniform approach on transfer pricing and amend FBT on ESOPs.

The industry recommends initiating time bound and outcome based implementation of the already-approved e-governance programs and evolve appropriate new programs. The Industry recommends implementing the announced unique identity card for each citizen.

The industry recommends building of education & skill for the industry. It recommends allocation of resources for scalable programs for nation-wide faculty development program, aligning curriculum with employability and developing institutes focused on R&D.

Analyst expectations

If the STP Scheme (Section 10A/10B) is extended which is most likely for one year atleast, there would be some relief for IT Companies and their bottomline would be boosted.

In case the tax exemption on STP units is not extended, the effective tax rate is estimated to increase to the 18-24% range (up from 11-17% currently) depending on the offshore/onsite mix, proportion of revenues from SEZ units and the contribution from the domestic business.

The impact would be more pronounced in case of mid-cap companies and ITES/BPO units.

Companies to watch

Infosys Technologies, TCS.

Outlook

The IT-ITeS industry is going to difficult times with the slowdown in the  global economies. The volume growth is now a worry. The companies have stopped recruiting and are sitting on a bench strength.

There could be some respite to the IT-ITeS companies if the STP scheme is continued and there is some relief on the FBT regulations. Recently, the IT-ITES Companies have seen a rally in the markets on signs of bottoming out and recovery of IT spent with some signs of recovery in US economy.