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Finmin opposed to extending tax sops to EOUs, STPIs beyond 2009
December, 25th 2007
In what may prove to be a big setback for the IT industry and small software export companies, the finance ministry has argued against extending tax exemptions to export-oriented units (EOUs) and software technology parks of India (STPI) beyond 2009, rejecting the demand of the commerce ministry and IT industry.

Apart from revenue implication, it may run the risk of being construed as subsidy to exporters and thus, liable to be challenged in the international fora (WTO), the revenue department wrote to the commerce ministry and Cabinet Secretary, expressing its opposition.

In this regard, the commerce ministry had recently prepared a note for the Cabinet Committee of Economic Affairs (CCEA) proposing to extend tax benefits to exporters to provide relief on account of rupee appreciation against dollar.

Observing that there is a need to raise tax-GDP ratio, the revenue department said sunset clause relating to tax exemptions to EOUs and STPIs should not be extended. At present, 90% of profits from software exports are exempted from tax, besides 100% income tax exemption on exports from EOU and STPI units.

In its pre-budget memorandum, IT industry body Nasscom had sought extension beyond 2009 of the tax holiday to firms set up in STPIs. The industry has claimed that rupee appreciation against the dollar by around 15% over the past one year has adversely affected the IT sector, which is contributing about 5% of the GDP.

Sources said the revenue department has also been supported by the Prime Ministers Economic Advisory Council, which has pointed out that the countrys long-term export competitiveness must be built on comparative advantage, and not on the back of tax concessions.

On tax exemptions to EOUs, the council said over the past 15 years, the manufacturing sector has had time to adjust to global forces of competition and has done remarkably well. The sector had enough time to enhance its competitiveness and there is still some time for the schemes to lapse, it added.

Profit-linked tax exemptions like those available under Section 10 A and 10 B of the Income Tax Act have been found to be iniquitous and regressive, read the letter written by the revenue department.

It also pointed out that the matter had been examined by the Planning Commission, which also concluded that tax benefits under the Income Tax Act should not be extended beyond the terminal assessment year 2009-10. The sources said such tax concessions were effective only in the pre-reform regime when exporters faced severe disadvantage, but that rationale is now thinning out.
 
 
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