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SEZ Rentals Turn Too Big For Smaller IT Companies
Posted by Pradeep Sadanapalli | July 5, 2008 | 1,430 views
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Loading ...Lack of clarity over norms to operate inside an IT special economic zone (SEZ) has put IT-ITeS companies in a dilemma as they plan to migrate all new IT contracts to an SEZ. Both SEZ developers and IT companies cite gray areas on basic issues like deployment of existing manpower, revenues and whether some part of clients’ work can be taken outside a SEZ unit.
About Rs 77,210 crore has already been invested in approved SEZs in India. Of the 207 notified SEZs, about 135 are from IT and ITeS sectors. In terms of in-principle approvals too, IT-ITeS form the major chunk at 429 approvals.
But many IT companies have dropped plans to shift to SEZs citing lack of clarity and high rentals. Companies are unclear whether they can relocate a part of their existing employee base working in a Software Technology Park (STP) to an IT SEZ without a decrease in revenues from the STP unit.
SEZ developers say that the government should clarify these issues as it impedes investment into IT SEZs.
Says Parsvnath SEZ director S Sharma: “The government should clarify the key issues relating to investments in manpower, new business, equipment and client in an IT SEZ unit by a STP unit. It’s urgently required as economies like China and Philippines are also in the race to acquire same business from clients the US. The business may go away if clients are not clear of the operations in the Indian unit.”
IT-ITeS companies are also wary of what happens if they outsource part of work from the STP unit to an IT SEZ unit. There’s also a lack of clarity on what will happen if an STP unit shows a drastic decrease in revenues if an existing client starts outsourcing contract to an IT SEZ unit.
Experts suggest that the best way to affect a migration of work from an STP unit to an IT SEZ is to float a SPV (Special Purpose Vehicle) and attract work and employees from an existing STP unit. One can create an SPV or an entirely new company and move staff and contracts in an IT SEZ.
Nasscom terms the government’s SEZ policy as skewed. Says Nasscom president Som Mittal: “The IT SEZs are not expanding to smaller towns, which will lead to skewed development. Companies in smaller towns don’t need 25 acre of space.”
Many IT companies have got a notification to develop their own IT SEZs. “We have got a notification for our own SEZ. But we are also exploring private developer SEZs because a single SEZ will be unable to support our growth. SEZs have to be located inside city areas as there will be huge attrition if it is based in far flung areas,” says Mr Satya Narain, head of facilities at Satyam BPO.
Technically, an STP unit can ‘debond’ itself from the STP scheme and move it’s employees and clients to a new SEZ unit. But there’s no clarity what action government will take if a company migrates after debonding.
“The IT SEZ policy is a non-starter for many small IT companies that generally start in one or two room shops. Even without STP registration, start ups should be allowed tax sops,” said Vishnu Dussad, CEO and MD of Nucleus Software.
Adds Birlasoft CFO K S Ananthanaryan: “The idea behind the SEZ policy was to promote new investments and accrue taxes from large IT players. But the small and medium sized players are bearing the brunt as SEZ rental costs are more than 100% higher, leaving us with no choice but to forgo the SEZ option.” Birlasoft had dropped plans to move to a SEZ.
Companies such as Infosys, TCS, Satyam have large campuses that are STP units. Over a period of time, most new contracts will move into SEZ units, leaving a large portion of stateof-the-art STP campuses unutilised. For instance, Infosys has four SEZs in Chennai, Mangalore, Pune and Chandigharh.
TCS for extension of tax benefits
TATA Consultancy Services (TCS) will ask for an extension of the tax benefits available to IT and ITeS companies under the Special Economic Zone (SEZ) Act. “For STPI, we asked to extend it beyond 2009 and it was extended by a year to 2010. As a body, we will certainly ask for extension of the tax benefits in SEZs as it follows the same norms as STPI,” said TCS managing director S Ramadorai at the company’s annual general meeting on Friday. However, he said that they did not know if there would be further concessions for STPIs. Union finance minister P Chidambram had announced in April that the tax exemption available to IT and ITeS companies under the software technology parks of India (STPI) would be applicable till March 2010.
POINTS OF CONCERN
- Companies are unclear whether they can relocate a part of their existing employee base working in a Software Technology Park (STP) to an IT SEZ without a decrease in revenues from the STP unit
- IT-ITeS companies are also wary of what happens if they outsource part of work from the STP unit to an IT SEZ unit
- About Rs 77,210 crore has already been invested in approved SEZs in India
SOURCES:
Economic Times
Topics: SEZ, Govt Failures, Information Technology |
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