The Indian IT industry, on recovery track from recession, has huge expectations from this

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year’s Union Budget. On top of the agenda is extension of tax holiday under the STPI scheme, which expires in 2011.

The sunset clause under section 10A and 10B of the Income Tax Act gives a tax holiday to IT/BPO companies operating under the STPI. The tax rate works out to 20 per cent at present. If the STPI scheme is withdrawn, the industry will have to pay a heavy corporate tax rate of over 33 per cent.

IT major Infosys’ CEO Kris Gopalakrishnan expressed hope that the Centre would extend the scheme in the budget. “Supporting medium and small enterprises with revenues up to Rs 100 crore by extending the STPI scheme to them should be considered,” he said.

Gopalakrishnan also called for changes and simplifications in the service tax refunds regime. The industry expects the government to take conducive steps for IT and make sure that more people get jobs in the sector, he added.

According to Naveen Aggarwal, executive director, KPMG, the extension of tax holiday for STP/ EOU by one year provided the timely succor to the industry which was reeling under tight margins, increased competition and rupee appreciation last fiscal. “With the industry targeted to grow at 15 per cent in the coming fiscal, it needs continued support from government to achieve this. The continuity of tax holiday for STP/ EOU units by 2-3 years is of prime importance at present, specifically for the SME sector. Whilst IT companies are no more zero tax companies due to introduction of MAT, the removal of the tax holiday would hit their post tax margins,” he said.

Nasscom president Som Mittal said, “We are saying that STPI should get same benefits. Units, which are small and cannot be established in 25 acre of property and are not in Tier II or III towns, should be given a level playing field. Now the question is who will help the extensions? Large companies are already catering to 22-23 per cent tax rate, because of MAT, 10 years period getting over, etc.”

The outsourcing sector which put India on the world map has a supporter in Sachin Pilot, minister of state for communications and IT for the extension. According to him, “it is important to first have a view, which will foster investments and create job opportunities. I think IT sector has been growing in one area that is really on uptake trend as whenever there was a slowdown in the market the sector was there to create growth and job opportunities. So we hope that the exemptions and benefits that the IT sector has been getting should continue and they be given some more relief and help them grow.’’

In case an extension is not possible, some top CXOs say that they would be happy even with equal parity between STPI and SEZ policies. TCS chief N Chandrasekaran said that while we are recommending for at least a one-year extension of STPI clause, we are ok with same treatment or parity for units under both STPI and SEZ.

Experts say that parity would be important for the development of SME companies and Tier-II & Tier-III cities in future even if the sunset clause is removed.

The famous sunset clause started in the 90s as an incentive to the then fledging industry. Set to end in 2009, it was extended last year. The tax holiday scheme helped the sector to grow to a 2.6 million strong workforce and trade body Nasscom expects IT exports to grow at an annual 13-15 per cent to touch $56-57 billion.

Apart from this, the sector is looking for abolition of minimum alternate tax (MAT), exemption of ESOPs from tax as salary perquisite and clarity on transfer pricing related amendments made in last budget.

Mukesh Aghi, Chairman of Steria India said, “the present economic environment has put tremendous margin pressures on the companies. The increase in MAT, from 10 to 15 per cent, has impacted cash flows of companies, at a time when liquidity is critical. The abolition of MAT on book profits of units operating in an STP/EoU would be a welcome step, as these units were originally entitled to enjoy a complete tax holiday in respect of their export profits.’’

The tax on Esops should be removed because it is a lever for benefiting employees and should be treated like long term capital gain, opined B Ramaswamy, chairman of Sonata Software. With IT industry looking at the desi market to boost revenues, it wants the government to give impetus to e-governance.