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India becoming too expensive for tech firms

Have to find somewhere cheaper to exploit
Fri Apr 18 2008, 17:49

OUTSOURCING TO INDIA may soon become a thing of the past for small to mid-sized technology firms, due to the increasing costs of rent, salaries and a looming end to the government’s tax holiday.

India’s technology, and especially software industry, has seen spectacular growth over the last few years, tripling in size to reach an astounding $52 billion. But it seems that the bubble may be about to burst.

The slowing US economy is having a big impact on India’s future as a market for outsourced business, with foreign firms tightening their belts as India’s currency strengthens, and operational costs soar, not to mention the fact that skilled manpower is becoming scarcer, and those available are demanding higher salaries. To add to tech companies’ concern, the government tax policy is also looking a bit uncertain.

Sankaran P. Raghunathan, president at the IT SME Association, an umbrella for 3,200 small to mid sized IT firms, told the WSJ's Marketwatch, "operating in India has become extremely difficult because of the government's fiscal policies."

He added that under the current Indian tax laws, software companies can take advantage of a tax holiday for income they make out of products manufactured at designated software-technology parks, which lowers taxes to between 12 and 15 per cent, as opposed to peak corporate tax, which stands at 33 per cent. But the tax legislation is nearing expiry in a year’s time, leaving an uncertain future ahead.

Big companies won’t necessarily be as affected as their small counterparts however, because they can take advantage of legislation allowing them to set up their own special economic zones, where they can keep their taxes to a level of between 18 and 22 per cent.

President of Nasscom, another umbrella organisation, Som Mittal, said in a statement that the industry hasn't yet given up hope for the government to extend the tax holiday, saying “we believe the government appreciates the issues that are there, and we still have one year to get this going."

Still, until the future looks a bit less shaky, foreign firms might have to consider relcocating somewhere cheaper than India. µ

 

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