Perils of Uncertainty

March 2009 had been a dreaded month for those companies set up under the STP
Scheme. It marked the end of tax benefits to export oriented companies. The STP
Scheme was started in 1991 to encourage software exports from India, providing a
single-window clearance for setting up of companies. In 1999, tax sops for ten
more years were announced. Back then, 2009 looked really far way.

Then came the SEZ Act of 2000, which got tweaked and now we have the SEZ Act
2005. This Act has brought in a fresh slew of benefits for a host of industries,
including the IT/ITeS sector. These include waiver of customs and excise duty,
deduction of 100% of profits and gains derived from export of articles or
services for five consecutive years, and 50% of profits for the next five years,
subject to certain conditions, and exemption from securities transaction tax,
again subject to specified conditions. Its a tough Act to follow, most SMEs
agree, as there are some stiff conditions. For instance, a company cannot move
one of its existing setups to the SEZ, to leverage the benefits under the SEZ
Act. Only new setups are allowed.

Now with the industry, especially the export oriented sectors slowing down,
and rupee settling to a strong level, the IT industry is hit. While the larger
players, arguably, can absorb the hit for a while, its the SMEs who bear the
brunt of this from the word go. Removal of the tax holiday under sections 10A
and 10B of the IT Act, 100% exemption on customs duty on imports, 100% excise
duty exemption on indigenous procurement, 100% foreign equity investment, and
various other benefits coming along with recession and a strong rupee make
things worse. The Finance Minister has announced that the tax benefits will be
extended to March 31, 2010. Nasscom has been working to get a ten-year
extension, but that has not yet happened. In the meantime, a one-year breather
would help to get new strategies in place. Questions still exist about the other
benefits? Will those be extended? Will the STPI Scheme merge with the SEZ Act?

Shyam Malhotra

So what should SMEs do? Should they wait for the government to make things
more clear? Or should they assume that no more changes are likely? Or should
they move their shops to other attractive destinations?

Most countries have woken up to the power of outsourcing, and are busy
figuring out how to market themselves so they can have a share of the pie too.
China, Malaysia, Eastern Europe, Latin Americaare all gearing up for this. And
part of this is tax breaks and incentives, which, in cases, would look more
attractive than what we have in India today. We have already seen new setups
happening across the world, so that IT and ITeS companies are able to service
their clients better, at competitive prices.

Another option is to focus on the domestic sector. The domestic IT sector
continues to look good, growing at 18.4%, which is better than the overall
industry growth rate of 16.5%, as per IDC Indias figures. Its all set to hit
Rs 2 trillion by 2012. Similarly, according to a study by Everest Research
Institute and Nasscom, the domestic BPO market is slated to be in the range of
$15-20 bn by 2012, compared to the overall BPO market of $50 bn.

One of the biggest perils of business is uncertainty. It freezes
decision-making. In the present scenario, there are too many uncertainties that
have emerged together. Some of them are not manageable. Others are. At least
those need to be removed. IT/ITeS exports have had a great run so far.
Conventional wisdom suggests that we should not shift tables when on a winning
streak.