STPI scheme and tax holidays: The two are not synonymous

The scheme was initiated to accelerate software exports; the tax exemption was but the icing, not the cake

When the finance minister announced a one-year extension of the Software Technology Parks of India (STPI) scheme - virtually passing the ultimate decision to his successor - what the IT industry reacted to was “finance minister’s decision to extend the tax holidays by one more year.” Not surprisingly, that was the headline of most media reports.
 
Tax exemption - that is all that the large IT services export firms see in the STPI scheme. And that is exactly what the finance minister is after. He is not convinced why these large firms - some of which make margins in the thirties, and are world leaders in their areas - need this exemption from the government. The combined tax contributions by these firms will be significant and as the person responsible for maximising tax revenues, he sees no harm in asking them to pay taxes. So, even when he announced a year’s extension, he made it very clear that he does not believe in exemptions, but rationalisation of tax rates - a statement targeted at those looking for some tax concession or the other.

Unfortunately, in this tug-of-war between the babus who believe that the IT industry should be taxed and the bigwigs of IT industry, the STPI scheme, which is the central point of debate, has taken a backseat. The debate has completely shifted to tax concessions.

That is unfortunate, to say the least. STPI was not started with that objective. When initiated, STPI scheme was aimed at accelerating India’s software exports. And two of the biggest challenges of that time that STPIs addressed were infrastructure and government clearance. This was much before the telecom revolution made high-speed lines available almost on demand and Chandrababu Naidu changed the equation between the state governments and IT companies. Tax holidays were the icing, not the cake.

Of course, things have changed since. But even today, hundreds of entrepreneurs leverage STPI for setting up start-ups in a no-hassle way, and in any part of India. And yes, tax exemption is important for them too, while struggling to get the first few customers.

FM’s tax rationalisation will not help them. It may help the large companies. But thousands of entrepreneurs will have to rethink if they could take all the troubles to set up a company or take the easier route of getting to a cosy job in an IBM or an Infosys.

In short, discontinuation of STPI scheme will affect entrepreneurship severely. The impact of that may not be visible immediately as the industry revenue will not be affected so much. The start-ups’ contribution to India’s IT industry revenue may be too less to be noticed. But the long-term progress of a growth economy like India will surely be affected. It is the disruptive changes brought by entrepreneurs that provide the big impetus for progress of an economy, not incremental growth brought in by the big and established.
 
At this stage, can India afford that?

SEZs: The anti-thesis of STPI

Ridiculously, many discussions around continuation of STPI scheme make comparisons of STPI and SEZ - something that takes into consideration the only commonality: tax exemption. Such is the pervasiveness of this belief - STPI means tax exemption. Comparing the two is like comparing how the sales of Mercedes S class and Nano will be affected if the price of the former is slashed by 10% and that of the latter is hiked by 10%!

SEZ is for the big and famous. STPI - while the big and famous do leverage its tax holiday clause - helps the entrepreneurs and small companies in a lot more ways.

A few in the know even say SEZs are a scheme to help the real estate lobby more than anyone else. I will not be that harsh, because I sincerely believe they have their own positives (even beyond tax exemption). My only submission is: please do not confuse between the two, as their objectives are very different.

Who will take up the cause of entrepreneurs?

Ever since the discussion started around the continuation discontinuation of the STPI scheme, a significant section of the IT industry captains has maintained that its continuation will help the small and medium companies. Even the finance minister’s announcement about the one-year extension saw reactions that highlighted this-how good it will be for small companies.

The obvious question to ask is: if it is all for the small medium companies, why not modify the scheme to make it applicable for small and medium companies only? The FM, who is going by simple calculations of how much tax revenue the government will make lose, is more likely to oblige in this case as he will still get the big money from large players as tax.

I will even go a step further. Rather than defining small medium by revenue, it will be more apt to define a time period for each company from the date of establishment - say six years, or even ten. After that, the company moves out of the STPI ambit.

This won’t just protect the interest of the entrepreneurs, it will also not cost the exchequer too much in terms of tax revenue loss, something the FM is so overtly worried about. I suggest time period rather than revenue, because a revenue-based criterion will reward poor performers while punishing companies who grow faster.

The problem is: I am not the first one to think of such a “radical” idea. It is a very natural thing to do. And many industry leaders know this. Question is: who will speak for the entrepreneurs? Every industry has associations. We do not have an Aspiring Entrepreneur Association of India.

May be, the FM can initiate.

Shyamanuja Das is editor of Dataquest, a CyberMedia publication