360° Vendor Management

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

One year from today, 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.

Whether it is next year or further in the future, the Indian government, given the social pressures of the country’s government faces, is clearly looking to cash-in on the enormous industry. This year, they introduces a Minimum Alternate Tax. They have also established Special Economic Zones (SEZs) that will will give tax incentives for fifteen years (100%, 50%, and up to 50% exceptions for each consecutive five year period). However, not ever Indian company operates in a SEZ, and it is unlikely will when STPI expires.

“If” is not the question, but “when” is. When it does, one thing is sure: the Indian outsourcing industry’s tax burdens will increase and they will undoubtedly look for you to pick-up the bill. More to the point, almost every country with significant ITO and BPO industries have similar tax incentive programs, and these governments will be carefully watching how India’s mature industry is monetized.

Here’s what you can do to mitigate your risk:

• Get more knowledgeable on this subject now. Talk with your attorneys, analysts and consultants. Do not wait for your vendor to “educate” you. There are many layers of taxes and your advisors will be able to separate hearsay from fact.
• Negotiate your pricing terms to reduce your exposure to changes in Indian taxes.
• Use the risk as another reason to diversify your offshore vendors and locations. Multi-location, multi-vendor strategies mitigate a wide variety of risks.
• Recognize that this change will not kill the Indian industry - it will just level the comparative costs among countries. India will likely become just as expensive as the Philippines.
• Adjust your financial plans now as you enter into 2009 budgeting and planning.

Other ideas? Other information about STPI or other incentives? Please share it by posting a comment!

This entry was posted on Monday, March 31st, 2008 at 10:51 am and is filed under Outsourcing Vendor Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.