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Shock and awe

Amir Ullah Khan | May 27, 2009
Election results in India and what it says for the future of the IT industry of the country

Pro incumbency and anti incumbency are only excuses. Those who work hard, and sincerely, get rewarded. Delhi, Andhra Pradesh, Bihar, Chattisgarh and Orissa are clear examples. Governments that fail to deliver get punished and this is what happened when people voted against ruling parties in Punjab, West Bengal and Uttaranchal. As with every rule there is an exception, and that is Gujarat.

Impact on the IT industry

The IT industry is waiting with bated breath as their 10-year tax holiday is ending this year when the Special Processing Zone scheme closes in 2009. What will the government do now? Will it continue to subsidise a 40-billion-dollar industry and allow it to get away without paying taxes? Or will it succumb to pressures from the influential lobby and extend the tax holiday?

This has an immediate issue and concern associated with the drama that happened with Satyam. While there are various reasons for the debacle, one important policy issue is that Satyam could get away with its fraud in inflating profits year after year because of the same tax holiday. It allowed the firm to inflate profits without having to pay anything for declaring high profits. In a situation where there is a clamour for taxing agriculture that hasnt been taxed for 100 years now, it will be difficult to avoid taxing the IT sector.

But will this lead to a cost disadvantage for investors in the IT industry? Will this also encourage IT firms from the US and Europe to look elsewhere when setting up offshore units? What is for sure is that there are a few million dollars at stake in making this policy decision.

Amir Ullah Khan teaches Economics and writes on India's political economy.


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