Withdrawal of STPI benefits to reduce net margins by 15-17 pc

New Delhi, Feb 20 (UNI) Indian IT industry lobby Nasscom and Crisil today jointly released a study which says withdrawal of STPI benefits is likely to further reduce net margins of IT-ITeS companies to 15-17 per cent by 2009-10.

The study also highlights that wage inflation alone could cause operating margins to decline from an average of 26-27 per cent in 2005-06 to 23-25 per cent by 2009-10, while the net margins are estimated to decline from an average of 19-20 per cent in 2005-06 to 16-18 per cent in the same period.

''We have been demanding that the government should extend the tax holiday under the STPI scheme for another 10 years. Currently, the tax holiday scheme has a sunset clause which will expire in 2009,'' Nasscom Chairman Ramalinga Raju told reporters while releasing a Nasscom-Crisil study on 'The rising tide - output and employment linkages of IT-ITeS'.

This is basically in the interest of the smaller companies, particularly when they are not having options of moving to distant places, he added.

The industry seems to be split between large companies that are setting up their own SEZ and medium and small companies which want the STPI scheme. It is not economical for mid and small IT companies to move to a SEZ since most of them do not have the scale or the investment capacity needed for a SEZ. Moving their new-growth options to the SEZs is also not economically viable for them.

In addition, this is a much needed continuation of the government policies, Mr Raju said adding that sustained cost competiveness remains a key factor in determining investment attractiveness. In this respect, the rising cost inflation and phasing out of the STP scheme (and the associated tax hoilday) are often cited as areas of concern.

Indicating a strong output effect, the study shows that on every Re 1 spent by the IT-ITeS on domestically sourced goods and services translates into a total output of Rs 2 in the economy. Moreover, it generates employment for less educated workforce.

The IT-ITeS sector will have a potential impact on the economy by year 2010 creating a total economic output of 115-120 billion dollars with an employment generation of 11.5 million.

''The study has taken a detailed cross-sectional view of the multiplier effects on income generation and job creation induced by the IT-ITeS sector,'' Nasscom President Kiran Karnik said adding that the analysis has also been extended to assess the impact of continued wage inflation and the removal of the STP benefits on the sector's medium term performance.

Regarding telecom sector, Mr Raju said all the regulatory barriers have been removed, but there are some barriers which inhibits 'work from home'.

UNI