Communications and Information Technology Minister A Raja has warned that withdrawal of income tax holiday to Software Technology Parks (STP) in 2010-11 Budget will have “devastating” effect and said the scheme should be modified to push growth in the sector.

“Termination or withdrawal of income tax benefits for STP units in March 2011 would have a devastating effect. Even short duration extensions of 1-3 years are unlikely to mitigate negative industry and investor sentiment,” Raja said in a letter to Prime Minister Manmohan Singh.

He said studies indicate that in spite of the income tax holiday under section 10A/10B of Income Tax Act, a STP unit is actually paying a reasonable quantum of other taxes, whereas for an IT unit located in a SEZ this tax liability is marginal or negligible.

Besides many STP units have completed their tax holiday period and were now paying income tax. As per industry estimates, overall, the average Income Tax paid by the sector today stood at about 17%, he said.
     
Raja said the task force on IT had also recommended extension of the income tax benefits and parity with SEZ scheme for software and services sector.

He quoted the task force as saying that the exports from Information Technology and Information Technology Enabled Services (IT/ITES) would go up to $82 billion by 2014 from the present $46.3 billion. It could go up to $175 billion by 2020.
     
In this context, he said “we propose a modified software technology parke scheme for 2010-11 budget so that IT/ITES sector grew further.

He said existing STP units might be provided with the same level of fiscal incentives as available to similar units in SEZs.
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The proposed modified STP scheme would provide a level playing field between STP and SEZ locations.

He said the sunset clause (withdrawal of income tax benefit under section 10A/10B beyond March 31, 2011) would hit over 80-90% of the IT/ITES exporters. There are over 5000 SMEs STP units and many STPs are in Tier-ll and Tier-lll locations.