Wednesday, April 2, 2008

What Will You Do When India’s Tax Incentives Vanish?

One year from, March 31, 2009, the Software Technology Parks of India tax scheme will sunset. When this happens, Indian companies will find their taxes increased from 10% to 20%. Depending on your specific contract terms addressing taxes, material changes, or other sections (talk with your legal team), vendor managers may be confronted with higher rates. What can you do to manage this?

First, some background information. STPI was created in 1991 to create tax incentives to stimulate India’s then-fledgling software export industry. It provides a combination of incentives, but the big incentive is the 10-year corporate tax exception granted to new organizations (Indian companies consistently create new organizations to restart the 10-year clock). Today, 95% of India’s software and BPO exports are subjective to this incentive. Exports are the services you are buying if you or one of your vendors outsourced work to a foreign country. Indian companies have been unsuccessfully lobbying the Indian government to extend STPI, but one never knows.

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