Chief Minister H D Kumaraswamy has urged the Centre to let the IT sector continue to enjoy the tax holiday beyond 2009.

The previous NDA government at the Centre had in 1999 put in place a 10-year income tax benefit for small units in the IT sector which expires in March 2009. After that date, only special economic zones (SEZs) will get the benefit, unless an extension is put in place.

The chief minister's concerns are understandable: Brand Bangalore in the IT sector is the byword for quality now and gives it the sheen that is the envy of cities and countries across the world. The CM push also carries a lot of weight, as close to 40% of Indias software exports emerge from the state.

Kumaraswamy, in a letter to Prime Minister Manmohan Singh, has specifically asked for the extension of tax holiday under Sections 10A and 10B of the Income Tax Act for units under the Software Technology Parks scheme. Failure to extend this tax holiday beyond 2009 would be an impediment for the growth of the small and medium enterprises (SMEs), he said.

Only 19 software companies in India, whose exports are worth more than Rs 500 crore, can establish their own SEZ campus and avail of income tax benefits. That leaves close to 4,800 SMEs with exports less than Rs 500 crore to migrate to a defined SEZ operated by either the government or private sector, if they want to avail of the benefit.

This will not be very convenient for a large section of the industry to physically shift to SEZs. It will leave behind a majority of SMEs and IT firms that depend heavily on the tax holiday, Kumaraswamy wrote.

Uncertainty about continuation of the tax holiday has put expansion plans of many multinational companies on hold. While the SEZ scheme would help to some extent, the dichotomy between the SEZ and the STP scheme will create inconvenience in the industry.

To boost IT, the Karnataka government offers special assistance, incentives and concessions for units with fixed assets of up to Rs 100 crore. Benefits include: Entry tax exemption: on computer hardware, computer peripherals and other capital goods, including captive power generation sets during the implementation stage, which can be extended up to five years from the date of commencement of implementation.

Quick clearances from the Karnataka State Pollution Control Board for companies that use captive diesel gensets.

Concessions on company registration charges for expansion, diversification, and modernisation.