Ishita Russell in New Delhi

Special economic zones dedicated to the infotech sector may receive a body blow if the tax exemptions provided to Software Technology Parks of India under Section 10(A) and 10(B) of the Income Tax Act are extended beyond March 31, 2009.

According to a senior central government official, not more than half of the nearly 100 notified infotech SEZs will survive if the tax sops are extended. Of the notified infotech zones, more than 25 are owned by IT companies, while the remaining are proposed to be set up by real estate developers and state government bodies.

If the government wants to extend the tax sops beyond March 31, 2009, the finance ministry will have to announce the extension in the coming Budget. If it does not decide to extend the sops, the relevant clauses will automatically lapse from April 1, 2009.

The top five players in the IT industry -- TCS [Get Quote], Infosys [Get Quote], Wipro [Get Quote], Satyam [Get Quote] and HCL [Get Quote] -- propose to set up more than 15 of the 25 infotech SEZs, providing them a cushion to fall back on, if the STPI extension does not come through.

According to the latest data available with the commerce ministry, of the total proposed investments of Rs 2,67,180 crore (Rs 2,671.8 billion) in over 140 notified SEZs, nearly Rs 64,000 crore is expected in infotech zones alone.

Analysts are bearish about the success of infotech SEZs if the tax sops are extended. Avinash Vashist of Tholons Advisory says: "The implications of the extension of the STPI scheme on the rush towards SEZs will be obvious. The number of IT-SEZs will be driven to below half the current number, given the gamut of clauses attached with acquiring an SEZ."

It is perhaps the reason that companies like HCL are setting up SEZs. Shiv Nadar, founder and chairman, HCL Technologies says: "Finance Minister P Chidambaram has made it clear that the STPI scheme will not be extended. SEZs provide more benefits now. That is why we will continue our investments in our SEZs."

Infosys CEO Kris Gopalakirshnan also clarified that the company's SEZ plans are on track. "STPI and SEZs are two separate entities. Hence, the possible extension of the STPI tax sops will not have any impact on our SEZ plans."

Nasscom chief Kiran Karnik says: "The SEZ scheme requires a large amount of investment, in terms of land or rent, which is not affordable by the small and medium enterprises, creating an uneven divide between the larger players and their smaller counterparts."

Karnik is critical of the government. "If the government is trying to protect its revenues, the purpose is still not solved as the big players have procured areas in the SEZ and are availing tax benefits, leaving the smaller players to face the brunt of the STPI scheme lapsing."

However, Lalit B Singhal, director-general, Export Promotion Council for EoUs (export-oriented units), said it was not feasible to do away with either (STPI and SEZ) of the schemes for the IT industry.

"Both the schemes have different attributes and have their own advantages. They should co-exist to provide the best benefit to the industry. So, the verdict on the STPI scheme will not affect the fate of the success of the IT SEZs to a large extent, as SEZs provide more comprehensive fiscal as well as infrastructural benefits," he says.

Analysts observing this trend opine that currently there is a huge rush for IT SEZs, which might slacken if the STPI scheme is extended. Deepak Dhanak, senior manager, Pricewaterhouse Coopers says, "Almost all the IT SEZs are full and nearly 80-85 per cent of them are getting operationalised."

"The pace of the IT SEZs may face a slowdown. However, STPI has its disadvantages and in hindsight will phase out," he added.

India's great rush for SEZs