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Tax exemption expiry worries Indian IT firms

Posted: 28 Apr 2008 ?? ?Print Version ?Bookmark and Share

Keywords:tax exemption? India chip design? IT firms?

The uncertainty about extending the 10-year tax holiday for IT companies have left Indian chip design houses in a quandary.

Most of the more than 200 design houses in India were launched under the Software Technology Parks of India (STPI) scheme, which offers a 100-percent tax exemption to IT companies through April 2009. In 1999, the Indian government offered tax exemptions on export earnings under the income tax law to increase India's software exports.

According to S. Janakiraman, chairman of the India Semiconductor Association (ISA), the government should extend the STPI scheme to the semiconductor sector. "Semiconductor design is a nascent industry and has not evolved as much as the IT services," he said. "If such incentives were to be withdrawn completely, there would be serious repercussions in this segment."

India's Finance Ministry may not decide on the STPI tax-exemption scheme until the last possible moment, resulting in a perceptible slowdown in the number of IT companies registering under the plan, according to STPI officials.

"There has been a drop in the number of IT companies registering with us for the last couple of quarters," said Bharat Bhusan, STPI's director general. He declined to provide specific numbers since fiscal 2007-2008 results won't be announced until May. "But both foreign and Indian IT firms have put their plans to expand under the STPI scheme" on hold, he added.

The impact of delays will be greatest among smaller Indian companies like chip design houses, industry watchers said.

Investment focus
Although India's Special Economic Zones (SEZ) remain attractive for promoting exports and the manufacturing sector, most expansion is coming from global companies and Indian IT giants like Infosys and Wipro Technologies along with mid-sized companies here. IT companies account for most of the new businesses in India's SEZs.

In the southern Indian state of Karnataka, for instance, 11 SEZs have been set up. Companies like IBM, Accenture, Honeywell as well as smaller companies such as MindTree, Subex and mConnect have registered under the SEZ scheme.

While the zones provide benefits similar to the STPIs, the SEZ concept is largely a land-based investment (about 10 hectares, or 26 acres) designed primarily to boost the manufacturing sector. Chip designers focus more on engineering talent, so are most affected by the delay in extending tax incentives.

"Startup companies, especially chip design firms, do not need more than 4,000 square feet to set up their initial operations. They would find it extremely difficult to get an SEZ approval and would not even have that kind of an investment to plow in in the first place," said Ganapathy Subramanian, cofounder and CEO of Cosmic Circuits, one of the few successful semiconductor companies in India.

Moreover, some say SEZ promoters are biased towards larger companies, believing it is better to attract well- known clients who need more space and a longer lease. Larger companies also offer predictable revenues, unlike riskier technology startups that need less space.

"Policies are used by the government to promote [technologies that otherwise don't] exist," said Raj Khare, cofounder and CEO of SureWaves, an Indian media convergence startup. "The STPI policy was created to boost the software exports, and it has succeeded to a great extent. What we now need is a set of policy incentives for technology- and product-driven companies and startups to develop into mature companies."

Booming market
With Indian chip demand growing due to increased electronics usage, the Indian design services market is forecast to reach $11 billion by 2010. Several companies have India-specific IC programs, ranging from Intel Corp. to a small Taiwanese company.

"Developing an ecosystem with innovative startups is crucial for the semiconductor sector," said J. Parthsarthy, STPI's director in Bengaluru. "A majority of our units in the STPI are small and medium companies, although a major chunk of revenues come from the tier-one companies. But we should be able to nurture the smaller ones with some kind of incentives and handholding. That's where the future growth lies."

But an executive with an India startup who asked not to be named said "nobody is thinking of setting up new companies. Everyone is looking for loopholes to survive."

The consensus here seems to be that further delays in announcing a decision on whether to extend the tax breaks will harm the entire IT ecosystem. Hardest hit by continuing delays, however, will be smaller semiconductor designers and startups.

- Sufia Tippu
EE Times

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