Extend tax holiday, include sops for R&D

by Ashutosh Desai    Feb 26, 2010

As a precursor to the 2010-11 budget, CXOtoday sought the views of the veterans in the IT industry. By far, implementation of GST (goods and service tax) and extension of the tax holiday for the STPI is at the top of the wish list — and for good reason. Both will factor in the profitability of a company and the amount of investment it can make in research, development and upgrades.

Last year s budget the finance minister made no mention about the taxation on software products. It was hoped that the government would formulate a policy framework to encourage product companies in India to innovate and create their own IP. "Eliminate service tax on software products in order to facilitate lower costs of software automation and spur technology adoption in India, says Balaji Sreenivasan, founder-CEO Aurigo Software Technologies. This has not been done and Sreenivasan feels it is a detrimental action for the country s growth and a negative sign for software product business in India."

This budget there is much talk about the possible implementation of the goods and service tax (GST) too. If implemented, it will prove beneficial to the common man, feels Shailendra Badoni, COO, Datacraft India Ltd. "Tax rationalization and a clear roadmap for GST implementation" will "bring transparency and bring simplicity in the tax regime," opined Manoj Chugh, president (India and SAARC), EMC Corporation. Chugh also hopes the government allows 100 percent depreciation for software spends by corporations because "investment in IT both hardware and software is a productivity enabler, which should be encouraged during tough market conditions."

Other industry seniors also seconded the opinion of extending the tax holiday for the STPI (Software Technology Park of India). Even though in 2009 the government extended this tax break for another year, "a long term plan would have been more beneficial to the IT industry," rued Mohan Sekhar, president and COO, Collabera. Sekhar found the abolishing of FBT and exempting packaged software from excise duty as positive takeaways this year.

Echoing this opinion, Puneet Datta, assistant director (marketing), Canon BIS, also hopes that the tax concessions received last year continue to stay through 2010 as "it will give us the added boost to achieve the growth rates projected before the slowdown hit the economy."

Implications of removing the tax holiday for STPI
If the tax holiday on export profits is not extended it "would materially impact the bottom line of IT companies," says Govind Rammurthy, CEO-MD, eScan.
This will result in a higher tax outflow, bringing on "enormous liquidity constraints on the IT sector". Rammurthy said this will effect investments in critical areas of global marketing spends, technology upgrades and R&D activities. Rammurthy hopes to hear of an extension to 2014.
"The expiry of this (tax holiday) provision coupled with the anti-outsourcing political legislation in the US could make India an uncompetitive off shoring destination," warns Surjeet Singh, CFO, Patni. Singh hopes the government offers tax sops on R&D and innovation activities to accelerate progress.

Keep the employee in mind
Speaking from the employee’s point of view, Badoni is of the opinion that the Government should take a "liberal view towards ESOP s being allotted to the employees, by not taxing the same at the time of allotment." Taxing should instead be done at the time of sale of shares, like it was done in the pre-FBT era. The Datacraft India COO explained that the country has just started recovering from a difficult period, which has had an impact on attracting and retaining talent. "This would to a large extent benefit the employees in long term."
Even though the country was not as severely affected by the financial downturn in the US last year, the slowdown has put the brakes on the profitability targets IT companies had made for themselves earlier. In lieu of this, they would like the government to extend the tax holiday that was allotted to software companies. It is set to expire on 31st March, 2011. Badoni hopes the Govt. extends the tax holidays for a period of five years for all STPIs and EOUs (export oriented units). This would truly impact the cash flow of companies and boost profitability, he explained. Badoni’s views had earlier been voiced by the Indo-American Chamber of Commerce (IACC) two years ago in order to cope with the variations of the Indian rupee.