TPI covers this topic in a report, below are some excerpts from the same:

Software Technology Park India (STPI) scheme was introduced in the formative years of the information technology (IT) industry in India. It provides certain concession in duties, levies and taxes to companies that export IT and IT-enabled services.The largest concession is the exemption from corporate tax for the initial ten years, from when a business "unit" is set up, all being subject to certain provisions of the Indian Income Tax Act.

However, like other holidays, this great holiday is gradually coming to an end in 2009, according to current legislation.

In the meantime, the government of India has introduced the Special Economic Zones Act 2005 which provides a 15-year tax holiday for units set up within the approved Special Economic Zones (SEZ).

Yes, this will certainly lead to a reduction in the providers' net margins. In fact, most of the Indian heritage service providers are potentially looking at  reductions of five to ten percentage points.

When dealing with Indian heritage service providers, TPI has occasionally witnessed some of these firms adopting negotiating positions that involve the inclusion of protective provisions for the tax impact - Clients establishing initial or renewed contractual relationships with these service providers should avoid the potential inclusion of unfavorable financial provisions related to sharing the impact of future changes in taxes because of the tax holiday coming to a close.

Source: 1

Tags: offshore - india - tax - competition - tpi

Prashanth Rai