Review STPI SEZ Acts to aid small and medium cos

Review STPI, SEZ Acts to aid small and medium cos

While large companies have the ability to move operations and manage facilities across the country, the small and medium size companies, which cannot do this, will be badly affected

Bhavin Turakhia

Thursday, February 21, 2008

With the IT industry growing at a fairly rapid pace, it is imperative that the extension in timelines for tax exemptions offered by section 10A – under the STPI Act be reviewed.

The last three years has seen the local IT industry grow with the influx of foreign direct investments (FDI) and the market has received a further boost with a number of MNCs coming to India and setting up shops.

We cannot ignore the fact that most of the business are coming from the US and Europe. And, with the rupee strengthening over the last six months, export income has come down by 12 – 15 per cent.

To add to this, the real estate rates have also gone significantly up, which impacts an IT company directly considering the main costs are in relation to people and setting up of facilities.

Companies therefore are looking for governmental benefits that will help sustain their business models.

While the spirit of the tax exemption was to encourage companies until they reach stability, with the sunset of the section 10A (it’s valid only up to April 2009), only large enterprises will be able to benefit from the exemption as they will then move to the SEZs or procure space in the SEZ.

Software units registered as an STPI under the STPI Act currently enjoy certain exemptions such as electricity duty, custom duty, etc. The primary benefit of this Act is the tax exemption under section 10 A, which says that a software unit registered as a STPI unit – which is into exports - does not have to pay tax for revenues it makes out of its exports.

The government has added a new section, 10AA, under the already-existing SEZ Act.

The SEZ Act has the same tax benefits under section 10AA, which the STPI Act has under section 10A. The only difference is that under STPI the company can be located anywhere in India, whereas the SEZ Act requires the company to own or purchase an office inside a SEZ zone.

Apart from that, in the SEZ Act the government needs to further define the formula for calculating tax exemption.

The formula states that tax exemption is calculated by dividing the export turnover of the unit divided by the total turnover of the company multiplied by the export profit.

Therefore, if a company has to set up multiple SEZ units, it must float a new company for each SEZ unit. While large companies have the ability to move operations and manage facilities across the country, the small and medium size companies will be badly affected.

Hence, a clarification and rectification for this formula is required, as the industry will continue to function thinking that the authorities will look into it, which right now is not happening. This in near future may lead to a major tax litigation, which can be avoided.

(The author is CEO, Directi Group)

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