STPI withdrawal may hit Infosys, Wipro net profit

Top Indian software exporters - Infosys and Wipro - have cautioned investors about a potential impact on their profitability because of higher tax rates, as the country’s over $40 billion IT industry prepares to cope with removal of tax holiday under the Software Technology Parks of India (STPI) scheme due to expire by March 2010.
“Our net income would decrease if the government of India imposes additional taxes or withdraws or reduces tax benefits or other incentives ,” India’s third biggest software company Wipro said in a recent regulatory filing with the US Securities and Exchange Commission (SEC).
Indian exporters have made significant tax savings under the STPI scheme during past few years, which allows them to enjoy tax holiday for a duration of ten years. For instance, these tax incentives resulted in a decrease in Infosys’ income tax expense to the extent of $325 million and $282 million for fiscal 2009 and fiscal 2008.
“Few of our STP units have already completed the tax holiday period and for the remaining STP units the tax holiday will expire by fiscal 2010,” Infosys said in its regulatory filing with SEC.
“In the event that the Government of India or the government of another country changes its tax policies in a manner that is adverse to us, our tax expense may materially increase, reducing our profitability ,” Infosys added.

Experts such as Partha Iyengar, head of research at Gartner India say that any ambiguity around extension of STPI scheme could impact India’s attractiveness as an outsourcing destination. “STPI is an important and critical issue to be addressed; hopefully the new government will do it soon. They need to rationalise the SEZ scheme and provide more clarity on tax incentives. Many of our customers are not sure if they should move their captive operations to SEZs, etc., because of lack of clarity,” he said.
The special economic zone (SEZ) policy of the government provides five-year tax holiday for the IT units, followed by gradual taxation after the fifth year.
“There have been demands to impose strict conditions which need to be complied with before an economic zone developed by a private entity is designated as special economic zone. If such regulations or conditions are imposed it would adversely impact our ability to set up new units in such designated special economic zones and avail ourselves of tax benefits,” Wipro added in its SEC filing.