Income tax holidays for small and medium sized IT companies.

An income tax holiday is a reduction or an elimination of a particular tax. It is a time-off from payment of income taxes. It is actually an incentive from the government to boost the business investment.

When comes to the IT industry, it has been enjoying the benefit of income tax holidays from quite sometime now. But, there are some conditions that have been imposed on the enjoyment of these benefits. ITH (Income Tax Holidays) are not given as a matter of right, but as a privilege to entities that have, after evaluation by the government, fully complied with the conditions, as prescribed by law.

From a global perspective, the IT industry is generally recognized as a research and development based industry, where they need help from the government bodies, to achieve their goals. A lot of countries like Australia, Singapore, UK, etc. provide R&D incentives for IT companies, which prove to be extremely advantageous to them.

The IT industry in India has traditionally been the youngest of all the other industries, that has rarely asked for anything but been granted none. Considering small and medium sized IT companies, they need more time to establish and start getting profits and most of the existing ones would require some more years to reach a sustainable position in the industry.

Income tax holidays are scheduled under section 10A &10B of Income Tax Act, which will expire on next year. The expiry of tax holidays is one of the biggest challenges for the IT industry, followed by increasing costs. In addition to this, the IT industry is facing two other problems. They need to move in Tier 2 locations and simultaneously have to attract adequate quality manpower. According to a study conducted by CII, these companies need an extension of tax holidays to survive in the industry.

The only hope is that NASSCOM, a global trade body, has already asked for an extension of 10 years. Most of the IT companies are in the “growth stage” of their life cycle. The IT would need a few more years to establish themselves in the industry scenario. So, the extension of the tax holidays will be an aid in their pursuit. The ending of tax holiday benefits, will certainly hit these companies. They are facing more challenges than the so-called big IT firms (right from the competition from other sectors to shortage of trained talents). The recently occurred global financial meltdown also made an impact on the industry.

By sonia