STPI tax holiday set to end, Indian IT companies worried

Indian IT companies have register phenomenal growth over last 15 years. Though it is argued that this growth is result of less intervention by the government in this industry but on the contrary facts suggest that this one of the most favour industry in India. These companies were, and still, enjoying the STP (Software Technology Park) tax holiday for over 15 years. This holiday allowed the companies to avoid paying any tax for their new unit for first 10 years. Big companies like Infosys, TCS, Wipro and Satyam etc kept opening new units around the country to avoid paying taxes. This benefit is expected to cease in March 2010. Big IT companies are lobbying through Nasscom and individually to get extension for another 5 years.

IT companies are arguing that this is difficult economic time and some other Asian countries (China, Russia, Philippines etc) are developing their IT sector very rapidly and giving tough competition to Indian IT companies. Other argument is that IT is giving jobs to hundreds of thousands every year and if the sector growth is slowed down then these jobs will not be there. Nasscom has done some study that suggest that in next one decade the industry will grow to five times and employ over 50 millions people, directly and indirectly. All these are emotional blackmailing tricks of the IT companies in India.

First of all, if the STP tax holiday is not extended then the companies will need to pay taxes but only on their profits and not revenue. These companies are currently earning net profit over 20%. This net margin is well above many industries and even much higher for IT industry in other countries. Arguments claiming that the competitiveness will be lost if they have to pay tax is illogical. Only problem is for the owner and the shareholders. They will earn less and may be IT sector will not remain as attractive in the stock market.

Secondly, employment growth will not remain high for next 10 years for various reasons. we do not have infrastructure and resources to produce to many software engineers at first place. Even if we open more institutes for IT diplomas, what is the guarantee that the Companies in India (not Indian companies only) will continue to get contracts. Why the companies in Philippines and Vietnam get outsourcing work? Are we better than them? Most of the outsourcing work comes to India or anywhere else because of the cheap labour and not because we have better engineers than in USA or Europe. Our competitive advantages are we are cheaper and speak English. East Asian countries can be cheaper than us so the first competitive advantage is gone. We speak English but so do the people of Vietnam and other countries. They speak accented English so do we. There is no way we can stop these countries to become center for future IT outsourcing. This will hamper the IT growth in India.

Thought the IT industry has given jobs to many youths but its high salaries and life style and long working hours have developed many psychological disorders. Some studies have shown that over 20% IT workers have some kind of depression or mental disorder. Many a time this is because of the work pressure or doing some work they do not like or understand. A lot of IT workers are in the industry because they get higher salary and not because they like this job.

There is no valid argument from the industry for the government to consider their request to extend the tax holiday. When other companies are liable to pay corporate tax these IT companies should pay tax as well. The earning from these taxes can be utilise to promote other industries or social welfare.