India extends tax holiday for software firms

In a major boost to the country’s information technology (IT) sector, Finance Minister P Chidambaram on Tuesday announced a one year extension of tax holiday to software companies under the Software Technology Parks of India (STPI) scheme.

The scheme, which was announced by the government in April 2000 as a 10-year tax holiday for the units under a policy for facilities based in technology parks, was set to expire in March 2009.

The tax exemption for IT-BPO companies has been extended to March 31, 2010 as was announced by Finance Minister P Chidambaram while replying to a debate on his budget proposals in Parliament on Tuesday.

The change has been made because the next budget is likely to be presented only after May 2009, the Finance Minister told parliament.

Meanwhile, Chidambaram also proposed tax exemption to three new oil refineries being built by public sector oil companies.

However, he added that the government will continue with its plan to withdraw Income Tax exemption for new refinery projects from March 2009.

Welcoming the the Finance Minister’s announcement, the National Association of Software and Services Companies (Nasscom) this decision will be particularly beneficial for BPO companies and the small and medium segment, who have been greatly impacted by the Rupee appreciation, inflation and signs of slowdown of the US economy.

This benefit will also give the IT-BPO companies time to come up with other workable and acceptable options for the future, beyond 2010.

The IT-BPO industry is expanding into tier 2 and 3 cities which will help remove the pressure on large centres as well as help in more balanced economic development.

It is important that government incentivise this move to tier 2 and 3 cities with STPI and Special Economic Zone (SEZ) like benefits.