Draft Report of the High Level Group on Services Sector

2.3.4 Government Incentives

There can be no doubt that after the economic reforms of 1991-92, liberalisation of external trade, elimination of duties on imports of information technology products, relaxation of controls on both inward and outward investments and foreign exchange and the fiscal measures taken by the Government of India and the State Governments and other incentives provided by them specifically for IT and BPO services have been major contributory factors for the sector to flourish in India and for the country to be able to acquire a dominant position in offshored services in the world. The major fiscal incentives provided by the Government of India have been for the Export Oriented Units (EOU), Software Technology Parks (STP), Special Economic Zones (SEZ) and Electronic Hardware Technology Park (EHTP). Some of the other benefits available to the sector are the EPCG scheme, the Star Export House Scheme &Target Plus Scheme, Services Tax Exemptions and certain specific customs and excise duty exemptions for inputs and specified capital goods for IT hardware and software.

One of the most effective schemes for the promotion of exports of IT and BPO is the Software Technology Parks of India (STPI) programme. The 48 STPI s that have been set up since inception of the programme have given a major boost to IT and BPO services exports. Apart from exemption from customs duty available for capital goods (with a few exemptions) there are also exemptions from service tax, excise duty, and rebate for payment of Central Sales Tax. But the most important incentive available is 100 percent exemption from Income Tax of export profits for a period of 10 year beginning from the commencement of manufacturing. However, the exemption for export profits is due to expire on March 31, 2009. SEZ Act 2005 gives benefits to units within the SEZ in respect of exports similar to those available to units within STPIs in respect of indirect taxes, although there are minor differences in operational details. There is a significant difference, however, in respect of income tax holiday: in that the exemption from income tax is tapered down over 15 years from the date of commencement of manufacture. There is 100 % exemption of export profits from income tax for the first five years, 50 % for the next five years and 50 % for the another five years subject to transfer of profits to special reserves.

But the most important difference is that unlike in the STPI there is no overriding sunset clause and new SEZ units will go on getting the benefits for a period of 15 years from the commencement of manufacturing for each of them. With the sunset clause for income tax exemption for STPIs becoming effective on March 31, 2009, there is a major problem of non-level playing field between units within existing STPIs and new units set up in the SEZs. Those within STPIs will stop getting income tax exemption and those within SEZs will be getting benefits for 15 years from the date of commencement of manufacturing. The STPIs are particularly concerned because their income tax benefits are coming to an end at a time when their profits have shrunk because of the appreciation of the Indian Rupee.